The Impact of Warrant Introductions on the Underlying Stocks, with a Comparison to Stock Options
Author | : Niclas Hagelin |
Publisher | : |
Total Pages | : |
Release | : 2003 |
Genre | : |
ISBN | : |
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This paper investigates the impact of warrant and stock option introductions on the Swedish market. To our knowledge, this is the first attempt to investigate the impact of warrant introductions. The results suggest that warrant introductions have no real effect on the underlying stock. The evidence indicates, on average, that no significant impact occurs on the price, bid-ask spread, volatility, trading volume, or number of actual trading days of the underlying stocks in the year following the warrant introduction. This is in contrast to earlier evidence from stock option introductions and may be explained by the more complex nature of warrants. This indicates that (1) decreased liquidity caused by a diversion of trade from the stock to the warrant is nonexistent and (2) volatility estimates for valuation purposes, before the actual introduction, can be approximated by historical estimates. Furthermore, the introduction of stock options, in contrast to warrants, is found to have a positive effect on the underlying stocks. Volatility and bid-ask spreads are found to decrease, while results regarding changes in trading volumes are more uncertain. Finally, we note that the failure to document any impact from warrant introductions can be a result of infrequent trading in the warrants themselves. Therefore, a similar study performed on a more liquid warrant market would be of interest.