A comparative anlysis of multiple warrants pricing models

Abstract

This study investigates three multiple warrant pricing models (the Lim-Terry model, the Darsinos-Satchell model and the Dennis-Rendleman model) and a standard warrant pricing model (the Galai-Schneller model) by using warrant data from the Stock Exchange of Thailand. The multiple warrant pricing models are expected to improve the standard model since the potential dilution effects across warrant series (the subtle slippage effect and the cross-dilution effect) are considered. All of the theoretical warrant values are compared with market prices and with each other. In addition, the pricing error statistics of each model are examined in various situations: in-the-money, at-the-money, out-the-money. The empirical results reveal that all the model tend to overestimate the market prices. The standard model performs worst. The model incorporated with both of the subtle slippage and cross-dilution effects outperform the others and provide best estimates for in-the-money warrants. It is obvious that the dilution effects across warrant series have a profound influence on valuating multiple warrants. Exercising each warrant series results in a decrease in the firm value and hence affects the exercising decision of the other series. Consequently, the subtle slippage effects and the cross-dilution effect should be taken into account when multiple warrants are valued.