Abstract
This paper documents the systematic overpricing of warrants relative to options. Models are developed in order to explain the cross-sectional variation in the relative pricing of these securities. Results indicate that relative pricing differences (RELDIFF) are related to various proxies of liquidity including days-to-maturity, relative trading volume and the mandated presence of market makers in the options market. The identity of warrant-issuers is also found to be significant in explaining relative pricing, possibly reflecting disparate levels of credit risk or it may be a manifestation of the different characteristics relating to the underlying shares upon which the warrants are issued. The paper also documents the impact that the change from floor trading to electronic trading had on the price formation process in the Australian Options Market.
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