The Demand for Warrants and Issuer Pricing Strategies

Abstract

We develop a model for the demand of warrants by individual investors with regard to their sensitivity to issuer margins, defined as the relative overpricing with respect to the theoretical value. Based on an empirical data set we show that investors are relatively margin-sensitive; that is, given similar warrants from different issuers or warrants with similar characteristics, investors tend to buy those with the lowest margin. Investors are, however, not absolutely margin-sensitive; that is, demand is not influenced by the overall margin level. Our model suggests an equilibrium with different issuer pricing strategies for different warrants in such a situation. Consistent with the model's predictions, we find that issuers vary their pricing with the moneyness of a warrant. We thus give an explanation for the dependence of issuer margins on a product's moneyness, which has been documented in the literature for several retail derivative products.

How does pricing affect investors’ product choice? Evidence from the market for discount certificates

“…Our results are partially in line with Baule and Blonski (2014), as we find a preference for round strike prices which are divisible by EUR 1 and EUR 5. The coefficient for RoundStrike 10 , however, is not statistically significant.…”

“…To control for the potential effects of marketing campaigns designed to promote certain products, we include the certificate's trading volume (CertTradeVolEuwax) on the respective trading day on the Euwax (number of certificates traded), adjusted by the number of that certificate the investor himself traded on the Euwax on that day. Baule and Blonski (2014) find that individual investors have a strong preference for 'round' strike prices, i.e., they prefer a discount certificate with a strike price of EUR 20 over an otherwise identical certificate with a strike price of EUR 20.50, for example. Therefore, we include the dummy variables RoundStrike 1 , RoundStrike 5 , and RoundStrike 10 which are 1 if the certificate's strike is divisible by EUR 1, 5, and 10, respectively, and 0 otherwise.…”

Market makers’ optimal price-setting policy for exchange-traded certificates

“…4 Moreover, it is often argued that it is hard for individual investors-due to limited financial literacy, especially in the case of very complex certificates-to assess the "fairness" of quoted prices as this would require to calculate fair market values. However, investors' do have a certain price sensitivity that limits the complete freedom of the issuers' price-setting power (Baule, 2011;Baule and Blonski, 2013). 5…”

Pricing effects when competitors arrive: The case of discount certificates in Germany

“…Recent research has used Granger causality tests to gain insights into the relationship between overpricing and retail investors' demand (Baule and Blonski, 2015). I follow another identification strategy, because basic requirements to apply causality tests are not met in my setting.…”

“…Relevant for my identification strategy is the finding by Baule and Blonski (2015) for bankissued warrants and Entrop et al (2015) for discount certificates. They find that retail investors demand products with round strikes more intensely than products without.…”