This paper uses mean-variance spanning tests to investigate whether third-party equity warrants can extend the efficient set. We find that third-party equity warrants are not redundant, in that the inclusion of this derivative instrument in an investor’s portfolio can enlarge the minimum-variance frontier for longs by 205 basis points and for shorts by 227 basis points. Our interviews confirmed that many investment banks often prefer to write warrants without cover. The range of smaller contract sizes and expiry dates available with warrants provides flexibility to investors that would be unavailable with the quarterly expiry cycles and larger contract sizes of option contracts.
|Number of pages||9|
|Journal||Journal of financial transformation|
|Publication status||Published - 2008|