Empirical Study on B-S Model Based Pricing of Warrants in China

Zhaoyuan Geng, Qi Ding, Junchi Zhang

Department of Applied Economics, Business School of Zhejiang University City College, Hangzhou, China.

DOI: 10.4236/ib.2013.51B012                

Abstract

This article valuated theoretical prices of covered warrants in china through fitting temporal series of target warrant prices and market information of corresponding underlying securities. Furthermore, the author surveyed the deviation between market price and theoretical price of warrant. In order to eliminate the inaccuracy caused by constant volatility assumption of B-S Model, the author creatively used Modified Exponentially Moving Average (Modified EMA) Model to calculate the historical volatility of market prices of warrants and fixed the best dilution factor through Grid Search Technique. Also, validities of calculation of historical volatility by Modified EMA Model and original EMA Model are compared. Original data came from market information during the period 2005-2008 supported by security trading software and calculation was done via Excel. At the same time when Chinese government was going to revive covered warrant market, this article provided a more accurate method of pricing covered warrant, also known as modified B-S Model.

Keywords

Warrant Pricing; Covered Warrant; B-S Model; EMA Model; Grid Search Technique

Conflicts of Interest

The authors declare no conflicts of interest.

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