Is There a Novelty Premium on New Financial Instruments? The Argentine Experience with GDP-Indexed Warrants

Author/Editor:

Alejo Costa ; Luca A Ricci ; Marcos d Chamon

Publication Date:

April 1, 2008

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper examines the Argentine experience with GDP-indexed warrants in order to gauge the existence of a novelty premium on new financial instruments. It develops a Monte Carlo pricing exercise to calculate the expected net present value of payments, on the basis of various forecast assumptions. The results show that the residual premium paid by these warrants over standard bonds declined significantly by about 600 basis points between December 2005 and July 2007. This suggests that financial innovation may be associated with premia, which decay reasonably fast.

Series:

Working Paper No. 08/109

Subject(s):

English

Publication Date:

April 1, 2008

ISBN/ISSN:

9781451869699/1018-5941

Stock No:

WPIEA2008109

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

40

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