ROBUSTNESS OF OPTION-LIKE WARRANT VALUATION

This paper presents a methodology for arriving at the unobserved asset value and its volatility of a firm with outstanding warrants. This enables us to price warrants correctly and to examine the robustness of ''option-like'' warrant valuation where the dilution that occurs when warrants are exercised is ignored. Our analysis helps to justify the frequent simplifying option-like warrant valuation. Furthermore, we examine 50,960 daily prices for 37 American-type warrants written on 16 German stocks over the period 1979-1990. The empirical results confirm our theoretical analysis: there is virtually no dilution-related pricing bias of the American constant variance diffusion model with the stock price as the state variable.