The effect of bond plus equity warrant issues on underlying asset volatility: an empirical analysis with conditional and unconditional volatility measures

Author： Becchetti Leonardo

Publisher： Routledge Ltd

ISSN： 1466-4305

Source： Applied Financial Economics, Vol.6, Iss.4, 1996-08, pp. : 327-335

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Abstract

The paper analyses the effects of a bond cum equity warrant (WB) financing strategy on the underlying stock volatility. The theoretical assumption is that the replacement of 'stock-bond portfolio hedging' with 'static derivative hedging' reduces the underlying stock volatility for WB issuers. The empirical analysis carried out on a nonsynchronous sample of Japanese high-tech firms, with conditional and unconditional volatility measures, confirms this hypothesis. The average standard deviation is reduced by 25% in the sample and around 73% of firms experience a reduction in unconditional volatility after the WB issue. This translates into a parallel significantly negative intercept shift of conditional volatility in ARCH models for around 70% of considered firms. ARCH results support the hypothesis that the volatility reduction effect is not determined by spurious contemporary changes in stock index volatility.