Warrant price responses to credit spread changes: Fact or fiction?

Abstract

We use a new approach to analyze the relationship between warrant prices and issuers’ credit spreads. This approach allows us to gain insights into whether issuers use their credit risk systematically to increase their profits. In a post‐Lehman sample, we find strong support for a systematic use since issuers decrease prices less after cred it spread increases than they increase prices after credit spread decreases. Credit spread decreases are accompanied by price increases on several successive days. This sluggish adjustment in prices can be explained by the fact that retail investors’ purchase decisions depend on product prices.

Credit risk in derivative securities: A simplified approach

“…Interestingly, while many subsequent papers acknowledge their work, they continue to use the simple model of Hull and White. Papers that cite the Baule et al (2008) paper, but nonetheless use the Hull and White (1995) approach, include Baule (2011), Baule and Tallau (2011), Baule and Blonski (2015), Entrop et al (2016), Schertler (2016), Schertler and Stoerch (2015), Schertler and Stoerch (2018), and Pelster and Schertler (2019).…”

Credit Risk in Derivative Securities - A Simplified Approach

“…Interestingly, while many subsequent papers acknowledge their work, they continue to use the simple model of Hull and White. Papers that cite the Baule et al (2008) paper, but nonetheless use the Hull and White (1995) approach, include Baule (2011), Baule and Tallau (2011), Baule and Blonski (2015), Entrop et al (2016), Schertler (2016), Schertler and Stoerch (2015), Schertler and Stoerch (2018), and Pelster and Schertler (2019).…”