The empirical test on the price differences between model prices and market prices of the Taiwanese reset warrants
Authors: Emily Ho, Hsinan Hsu
Journal: Chiao Da Management Review. Jun. 2006, 26(1): 87-117.
Keywords: Reset warrant; Monte Carlo simulation; Price difference; Pooling regression
Abstract:
The property of the reset warrant is that if the underlying stock price of the reset warrant satisfies reset conditions during the reset
period, its strike price may be reset to a lower strike. This paper investigates the price differences between model prices and market
prices of the Taiwanese reset warrants. First, the Monte Carlo simulation method is used to calculate the prices of the reset warrants.
Secondly, this paper adopts paired to test to investigate the price differences between model prices and market prices of reset warrants.
Then time series / cross-section pooling regression is further performed to identify the factors affecting the price differences.
The depth of in-the-money, time to maturity, types of reset warrants, reset period and times allowed for resetting are considered
in the pooling regressions to find the factors affecting the price differences between model prices and market prices of reset warrants.
This paper finds that there is a strong evidence to support that model prices and market prices of reset warrants are different.
The price differences between model prices and market prices of reset warrants are influenced by the depth of in-the-money, time
to maturity, types of reset warrants, reset period and times allowed for resetting.