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

UR - https://www.scopus.com/record/display.uri?eid=2-s2.0-84996562113&origin=resultslist&sort=plf-f&src=s&imp=t&sid=127.0.0.1%3a424a983e%3a158bcc79bba%3a-28047179&sot=afnl&sdt=aff&sl=140&s=%28AF-ID%28%22%5bNo+Affiliation+ID+found%5d%22+%2b60072202%29%29+AND+%2bAND%2bORIG-LOAD-DATE%2bAFT%2b1480051838%2bAND%2bORIG-LOAD-DATE%2bBEF%2b1480657779%2bAND%2bPUBYEAR%2bAFT%2b2014&relpos=19&citeCnt=0&searchTerm=

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 -