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Study on the Pricing of Warrants in China’s Market

Author: WangHang
Tutor: XuZhi
School: Southwestern University of Finance and Economics
Course: Finance
Keywords: pricing of warrants volatility GARCH model pricing error
CLC: F832.51
Type: Master's thesis
Year: 2010
Downloads: 113
Quote: 0
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Abstract


Warrants is issued by the underlying securities issuer or others, agree the holders have the rights to buy or sell underlying securities in agreed price in particular due date or within a specified period, or receiving a cash settlement of the securities spreads。With the split share structure reform in China’s stock market, warrants as a compromise, ascended the stage of history. Warrants as derivatives；on China’s securities market have an important significance. In the warrant pricing process, although the Black-Scholes equation a lot of assumptions, it is widespread as its convenience and simplicity. Many scholars have put forth other theories, including the stochastic volatility model, GARCH model and so on. Obviously in the China’s stock market, most stocks have clear GARCH phenomenon. the use of traditional Black-Scholes equation pricing our warrants is clearly unable to obtain satisfactory results. This paper have analysis the guodianCWBl after estimating the underlying stock GARCH model and using a locally risk-neutral valuation relationship (LRNVR)which is be proposed by Duan. Then this paper found that the co-integration relationship between the bias that between the GARCH model and the market price of the warrants and the underlying stock exists. It implies they have a long-run equilibrium relationship.The GARCH pricing error does not eliminate in long run.This paper first outlines the development of warrants in china and characteristics of the warrants. In 1992, the Shanghai Stock Exchange (SSE) launched the first warrants:da fei yue. In 2005, due to the split share structure reform warrants reappear in China’s securities market. To improve the efficiency of warrant pricing, SSE presented the creation mechanisms.Secondly, this paper presents some theories about the option price. According to the principle of no-arbitrage analysis, Black and Scholes made famous option pricing model. In 1979, Cox, Ross, Rubinstein proposed a relatively simple method about option price. Monte Carlo simulation is a numerical simulation method. Duan (1995) through the local risk-neutral valuation relationship established an option pricing model which uses the GARCH model. Hardle and Hanfner (2000) based on the the Duan’s work and establish a threshold GARCH model.Third, this paper studies a warrant empirically. This paper have estimated the theoretical price of guo dian CWB1 based on historical volatility of the Black-Scholes model and Monte Carlo simulation methods, and based on the GARCH option pricing model which be proposed by Wolfgang Hardle, Christian M. Hafner (2000), The GARCH model is shown to be a good parameterization of the process. Then this paper uses the co-integration theory and found that there is a co-integration relationship between the GARCH pricing errors and the underlying stock price.Finally, this paper summarizes the empirical research and put forward relevant recommendations. Because of the GARCH effect, the GARCH option prices are substantially closer to observed market prices than the Black-Scholes model and the Monte Carlo simulation method. We should be taken into account time-varying volatility. China’s securities market mechanism and the lack of arbitrage short selling mechanism led the long-term deviation from its theoretical value of the warrants will not be corrected. The creation of mechanisms and the introduction of market-maker system should be completed. Meanwhile, the regulators should enhance education for the investors and guide investors should be guided to be more rational.

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CLC: > Economic > Fiscal, monetary > Finance, banking > China's financial,banking > Financial market
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