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Journal Article

The Pricing of Japanese Equity Warrants

Hiroto Kuwahara and Terry A. Marsh
Management Science
Vol. 38, No. 11, Focused Issue on Financial Modeling (Nov., 1992), pp. 1610-1641
Published by: INFORMS
Stable URL: http://www.jstor.org/stable/2632472
Page Count: 32
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The Pricing of Japanese Equity Warrants
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Abstract

Discrepancies between the Black-Scholes value of Japanese equity warrants and their observed prices are explained in part by the stochastic volatility of changes in prices of the underlying stocks. We fit GARCH and EGARCH models to the stochastic volatility and briefly compare their performance to the CEV model. A hopscotch algorithm is used to value the warrants in the presence of the stochastic stock price volatility. The stochastic volatility-hopscotch warrant values still differ substantially from corresponding prices; in contrast, away-from-the-money short-term Nikkei 225 options valued with the same stochastic volatility models are close to observed prices. A regression model is used to fit the differences between warrant values and prices as a function of proxies for market impediments.

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