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Pricing Warrants: An Empirical Study of the Black-Scholes Model and Its Alternatives

Authors

  • BENI LAUTERBACH,

  • PAUL SCHULTZ

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    • Bar Ilan University and The Ohio State University, respectively. We would like to thank Bill Christie, Bob Korajczyk, Elli Kraizberg, Marc Reinganum, Mike Rozeff, René Stulz, and especially Francis Longstaff, Jay Ritter, and an anonymous referee for helpful comments and suggestions.


ABSTRACT

This paper uses a sample of over 25,000 daily warrant prices to empirically investigate potential problems with the commonly used warrant pricing model proposed by Black and Scholes as an extension of their call option model. One problem seems to be especially important: the constant variance assumption of the dilution adjusted Black-Scholes model appears to cause biases in model prices for almost all warrants and over the entire sample period. We show that more accurate price forecasts are obtained with a specific form of the constant elasticity of variance model.

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