Behavioral Preferences for Individual Securities: The Case for Call Warrants and Call Options

Since 1998, large investment banks have flooded the European capital markets with issues of call warrants.This has led to a unique situation in the Netherlands, where now call warrants, traded on the stock exchange, and long-term call options, traded on the options exchange, exist.Both entitle their holders to buy shares of common stock.We use the long-term call options in order to price the call warrants.Using the model of Black and Scholes (1973), the Square Root model version of the Constant Elasticity of Variance model of Cox and Ross (1976), and the Binomial model of Cox et al.(1979) we find that the call warrants are strongly overvalued durin the first five tradin days.The average overvaluation is between 25 and 30 percent for all three models.Only a small part of this overvaluation can be explained by rational arguments such as transaction costs.We conclude that the overvaluation can be attributed to a behavioral preference of private investors for call warrants