Market Structure and its Effects on the Pricing of Derivative Securities in Australia

This paper examines whether two securities that have identical payoffs, the equity warrant and the exchange traded option, are priced differently when they are subject to different microstructure issues. The results show that different trading processes, the behaviour of market makers and short-selling restrictions seem to have an effect on relative pricing. This study indicates that, on average, a warrant is priced higher relative to an equivalent option. It appears that this pricing difference may be related to greater liquidity in the warrant market as compared to the option market.