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Appears in Collections:Accounting and Finance Journal Articles
Peer Review Status: Refereed
Title: An empirical analysis of the pricing of bank issued options versus options exchange options
Author(s): ter Horst, Jenke
Veld, Chris
Keywords: Financial marketing
Bank-issued options
Long-term call options
Call warrants
Options (Finance) Prices Netherlands
Stocks Prices
Banks and banking Netherlands
Issue Date: Mar-2008
Date Deposited: 30-Apr-2008
Citation: ter Horst J & Veld C (2008) An empirical analysis of the pricing of bank issued options versus options exchange options. European Financial Management, 14 (2), pp. 288-314.
Abstract: Since 1998, large investment banks have become active as issuers of options, generally referred to as call warrants or bank-issued options. This has led to an interesting situation in the Netherlands, where simultaneously call warrants are traded on the stock exchange, and long-term call options are traded on the options exchange. Both entitle their holders to buy shares of common stock. We start with a direct comparison between call warrants and call options, written on the same stock and with the same exercise price, but where the call option has a longer time to maturity. In 13 out of 16 cases we find that the call warrants are priced higher, which is a clear violation of basic option pricing rules. In the second part of the analysis we use option pricing models to compare the pricing of call warrants and call options. If implied standard deviations from options are used to price the call warrants we find that the call warrants are strongly overpriced during the first five trading days. The average overpricing is between 25 and 30 percent. Only a small part of the overpricing can be explained by rational arguments such as transaction costs. We conclude that the overvaluation can be explained by a combination of an active financial marketing by the banks and the framing effect.
DOI Link: 10.1111/j.1468-036X.2007.00394.x
Rights: The definitive version is available at

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