Issuers’ credit risk and pricing of warrants in the recent financial crisis

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Issuers’ credit risk and pricing of warrants in the recent financial crisis. / Schertler, Andrea; Störch, Saskia.
in: Journal of Risk Finance, Jahrgang 16, Nr. 4, 17.08.2015, S. 444-462.

Publikation: Beiträge in ZeitschriftenZeitschriftenaufsätzeForschungbegutachtet

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@article{e691c7a5711145df9b0b9a4a63399636,
title = "Issuers{\textquoteright} credit risk and pricing of warrants in the recent financial crisis",
abstract = "Purpose – The purpose of this paper is to investigate whether factor sensitivities of margins of bank-issued warrants depend on issuers{\textquoteright} credit risk during the period of economic turmoil between January 2008 and June 2010. Design/methodology/approach – Therefore, first, Fama–MacBeth estimations were applied and it was demonstrate that the sensitivities of margins in terms of time to maturity and moneyness vary substantially over time; the average outcomes are similar to the results of classical pooled estimations. Findings – Then, time-series tests were used and it was found that the steepness of the issuers{\textquoteright} credit default swap (CDS) spread curves correlates negatively with the time-to-maturity sensitivities as well as with the explanatory power of Fama–MacBeth estimations. Research limitations/implications – These findings indicate that the life-cycle hypothesis is weakened when the issuers{\textquoteright} CDS spread curves become steeper. Originality/value – Thus, this study offers a new approach to gain insights into the role of issuers{\textquoteright} credit risk on price setting behavior.",
keywords = "Management studies, Credit spread curve, Crisis, Fama–MacBeth estimations, Warrants",
author = "Andrea Schertler and Saskia St{\"o}rch",
year = "2015",
month = aug,
day = "17",
doi = "10.1108/JRF-12-2014-0174",
language = "English",
volume = "16",
pages = "444--462",
journal = "Journal of Risk Finance",
issn = "1526-5943",
publisher = "Emerald Publishing Limited",
number = "4",

}

RIS

TY - JOUR

T1 - Issuers’ credit risk and pricing of warrants in the recent financial crisis

AU - Schertler, Andrea

AU - Störch, Saskia

PY - 2015/8/17

Y1 - 2015/8/17

N2 - Purpose – The purpose of this paper is to investigate whether factor sensitivities of margins of bank-issued warrants depend on issuers’ credit risk during the period of economic turmoil between January 2008 and June 2010. Design/methodology/approach – Therefore, first, Fama–MacBeth estimations were applied and it was demonstrate that the sensitivities of margins in terms of time to maturity and moneyness vary substantially over time; the average outcomes are similar to the results of classical pooled estimations. Findings – Then, time-series tests were used and it was found that the steepness of the issuers’ credit default swap (CDS) spread curves correlates negatively with the time-to-maturity sensitivities as well as with the explanatory power of Fama–MacBeth estimations. Research limitations/implications – These findings indicate that the life-cycle hypothesis is weakened when the issuers’ CDS spread curves become steeper. Originality/value – Thus, this study offers a new approach to gain insights into the role of issuers’ credit risk on price setting behavior.

AB - Purpose – The purpose of this paper is to investigate whether factor sensitivities of margins of bank-issued warrants depend on issuers’ credit risk during the period of economic turmoil between January 2008 and June 2010. Design/methodology/approach – Therefore, first, Fama–MacBeth estimations were applied and it was demonstrate that the sensitivities of margins in terms of time to maturity and moneyness vary substantially over time; the average outcomes are similar to the results of classical pooled estimations. Findings – Then, time-series tests were used and it was found that the steepness of the issuers’ credit default swap (CDS) spread curves correlates negatively with the time-to-maturity sensitivities as well as with the explanatory power of Fama–MacBeth estimations. Research limitations/implications – These findings indicate that the life-cycle hypothesis is weakened when the issuers’ CDS spread curves become steeper. Originality/value – Thus, this study offers a new approach to gain insights into the role of issuers’ credit risk on price setting behavior.

KW - Management studies

KW - Credit spread curve

KW - Crisis

KW - Fama–MacBeth estimations

KW - Warrants

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U2 - 10.1108/JRF-12-2014-0174

DO - 10.1108/JRF-12-2014-0174

M3 - Journal articles

VL - 16

SP - 444

EP - 462

JO - Journal of Risk Finance

JF - Journal of Risk Finance

SN - 1526-5943

IS - 4

ER -

DOI