Empirical Exercise Behavior of Warrant Holders and its Consequences for Warrant Values

In this paper, we analyze the exercise behavior of warrant holders and its impact on warrant values. For this purpose, we propose a parametric model to describing the exercise volume of warrants and calibrate it to exercise data of 40 warrants from the German market. We find that few too-early exercises but also a significant number of too-late exercises occur. This observed exercise behavior results in warrant values that are more than three percent below those under the optimal exercise strategy for at-the-money warrants and the differences are even much higher for inand out-of-the-money warrants.