Results 11  20
of
1,728
Efficient analytical approximation of American option values.
 Journal of Finance
, 1987
"... ..."
(Show Context)
Who makes acquisitions? CEO overconfidence and the market’s reaction
, 2007
"... Does CEO overconfidence help to explain merger decisions? Overconfident CEOs overestimate their ability to generate returns. As a result, they overpay for target companies and undertake valuedestroying mergers. The effects are strongest if they have access to internal financing. We test these predi ..."
Abstract

Cited by 222 (12 self)
 Add to MetaCart
Does CEO overconfidence help to explain merger decisions? Overconfident CEOs overestimate their ability to generate returns. As a result, they overpay for target companies and undertake valuedestroying mergers. The effects are strongest if they have access to internal financing. We test these predictions using two proxies for overconfidence: CEOs' personal overinvestment in their company and their press portrayal. We find that the odds of making an acquisition are 65 % higher if the CEO is classified as overconfident. The effect is largest if the merger is diversifying and does not require external financing. The market reaction at merger announcement (–90 basis points) is significantly more negative than for nonoverconfident CEOs (–12 basis points). We consider alternative interpretations including inside information, signaling, and risk tolerance.
Stochastic Volatility for Lévy Processes
, 2001
"... Three processes re°ecting persistence of volatility are initially formulated by evaluating three L¶evy processes at a time change given by the integral of a mean reverting square root process. The model for the mean reverting time change is then generalized to include NonGaussian models that are so ..."
Abstract

Cited by 209 (12 self)
 Add to MetaCart
Three processes re°ecting persistence of volatility are initially formulated by evaluating three L¶evy processes at a time change given by the integral of a mean reverting square root process. The model for the mean reverting time change is then generalized to include NonGaussian models that are solutions to OU (OrnsteinUhlenbeck) equations driven by one sided discontinuous L¶evy processes permitting correlation with the stock. Positive stock price processes are obtained by exponentiating and mean correcting these processes, or alternatively by stochastically exponentiating these processes. The characteristic functions for the log price can be used to yield option prices via the fast Fourier transform. In general, mean corrected exponentiation performs better than employing the stochastic exponential. It is observed that the mean corrected exponential model is not a martingale in the ¯ltration in which it is originally de¯ned. This leads us to formulate and investigate the important property of martingale marginals where we seek martingales in altered ¯ltrations consistent with the one dimensional marginal distributions of the level of the process at each future date. 1
Option Exercise Games: An Application to the Equilibrium Investment Strategies of Firms
 Review of Financial Studies
"... Under the standard real options approach to investment under uncertainty, agents formulate optimal exercise strategies in isolation and ignore competitive interactions. However, in many realworld asset markets, exercise strategies cannot be determined separately, but must be formed as part of a str ..."
Abstract

Cited by 158 (5 self)
 Add to MetaCart
Under the standard real options approach to investment under uncertainty, agents formulate optimal exercise strategies in isolation and ignore competitive interactions. However, in many realworld asset markets, exercise strategies cannot be determined separately, but must be formed as part of a strategic equilibrium. This article provides a tractable approach for deriving equilibrium investment strategies in a continuoustime Cournot–Nash framework. The impact of competition on exercise strategies is dramatic. For example, while standard real options models emphasize that a valuable “option to wait ” leads firms to invest only at large positive net present values, the impact of competition drastically erodes the value of the option to wait and leads to investment at very near the zero net present value threshold. The real options approach to analyzing investment under uncertainty has become part of the mainstream literature of financial economics. The real options approach to investment now typically comprises an entire chapter in corporate finance textbooks [see, e.g., Brealey and Myers (2000) and Van Horne (1998)]. Essentially the real options approach posits that the opportunity to invest in a project is analogous to an American call option on the investment opportunity. Once that analogy is made, the vast and rigorous machinery of financial options theory is at the disposal of real investment analysis. The real options approach is well summarized in Dixit and Pindyck (1994) and Trigeorgis (1996).1 A feature that the vast majority of real options articles have in common is the lack of strategic interaction across option holders. Investment (exercise) strategies are formulated in isolation, without regard to the potential impact of other firms ’ exercise strategies. The standard starting point for such models is an exogenous process for underlying asset values (e.g., the stock price in
Employee stock option exercises: An empirical analysis,
 Journal of Accounting and Economics
, 1996
"... Abstract This paper describes the exercise behavior of over 50,000 employees who hold longterm options on employer stock at eight corporations. Employees typically exercise options years before expiration, commonly sacrificing half of the BlackScholes value. Exercise is strongly associated with r ..."
Abstract

Cited by 153 (6 self)
 Add to MetaCart
(Show Context)
Abstract This paper describes the exercise behavior of over 50,000 employees who hold longterm options on employer stock at eight corporations. Employees typically exercise options years before expiration, commonly sacrificing half of the BlackScholes value. Exercise is strongly associated with recent stock price movements, the markettostrike ratio, proximity to vesting dates, time to maturity, volatility, and the employee's level within the company. These findings have implications for compensation planners, the FASB as it develops a new accounting standard for options, and financial statement users and preparers who apply and interpret the new FASB standard.
Stock Volatility and the Crash of ‘87
, 1989
"... This paper analyzes the behavior of stock return volatility using daily data from 1885 through 1987. The October 1987 stock market crash was unusual in many ways relative to prior history. In particular, stock volatility jumped dramatically during and after the crash, but it returned to lower. mor ..."
Abstract

Cited by 151 (1 self)
 Add to MetaCart
This paper analyzes the behavior of stock return volatility using daily data from 1885 through 1987. The October 1987 stock market crash was unusual in many ways relative to prior history. In particular, stock volatility jumped dramatically during and after the crash, but it returned to lower. more normal levels quickly. I use data on implied volatilities from call option prices and estimates of volatility from futures contracts on stock indexes to confirm this result.
Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options
 Econometrica
, 2000
"... As applied to the behavior of homeowners with mortgages, option theory predicts that mortgage prepayment or default will be exercised if the call or put option is ‘‘in the money’ ’ by some specific amount. Our analysis: tests the extent to which the option approach can explain default and prepayment ..."
Abstract

Cited by 137 (16 self)
 Add to MetaCart
As applied to the behavior of homeowners with mortgages, option theory predicts that mortgage prepayment or default will be exercised if the call or put option is ‘‘in the money’ ’ by some specific amount. Our analysis: tests the extent to which the option approach can explain default and prepayment behavior; evaluates the practical importance of modeling both options simultaneously; and models the unobserved heterogeneity of borrowers in the home mortgage market. The paper presents a unified model of the competing risks of mortgage termination by prepayment and default, considering the two hazards as dependent competing risks that are estimated jointly. It also accounts for the unobserved heterogeneity among borrowers, and estimates the unobserved heterogeneity simultaneously with the parameters and baseline hazards associated with prepayment and default functions. Our results show that the option model, in its most straightforward version, does a good job of explaining default and prepayment, but it is not enough by itself. The simultaneity of the options is very important empirically in explaining behavior. The results also show that there exists significant heterogeneity among mortgage borrowers. Ignoring this heterogeneity results in serious errors in estimating the prepayment behavior of homeowners.
New Insights Into Smile, Mispricing and Value At Risk: The Hyperbolic Model
 Journal of Business
, 1998
"... We investigate a new basic model for asset pricing, the hyperbolic model, which allows an almost perfect statistical fit of stock return data. After a brief introduction into the theory supported by an appendix we use also secondary market data to compare the hyperbolic model to the classical Black ..."
Abstract

Cited by 136 (7 self)
 Add to MetaCart
We investigate a new basic model for asset pricing, the hyperbolic model, which allows an almost perfect statistical fit of stock return data. After a brief introduction into the theory supported by an appendix we use also secondary market data to compare the hyperbolic model to the classical BlackScholes model. We study implicit volatilities, the smile effect and the pricing performance. Exploiting the full power of the hyperbolic model, we construct an option value process from a statistical point of view by estimating the implicit riskneutral density function from option data. Finally we present some new valueat risk calculations leading to new perspectives to cope with model risk. I Introduction There is little doubt that the BlackScholes model has become the standard in the finance industry and is applied on a large scale in everyday trading operations. On the other side its deficiencies have become a standard topic in research. Given the vast literature where refinements a...
Procyclicality of the financial system and financial stability: issues and policy options
 BIS PAPERS
, 2001
"... ..."
Numerical Valuation of High Dimensional Multivariate American Securities
, 1994
"... We consider the problem of pricing an American contingent claim whose payoff depends on several sources of uncertainty. Using classical assumptions from the Arbitrage Pricing Theory, the theoretical price can be computed as the maximum over all possible early exercise strategies of the discounted ..."
Abstract

Cited by 130 (0 self)
 Add to MetaCart
We consider the problem of pricing an American contingent claim whose payoff depends on several sources of uncertainty. Using classical assumptions from the Arbitrage Pricing Theory, the theoretical price can be computed as the maximum over all possible early exercise strategies of the discounted expected cash flows under the modified riskneutral information process. Several efficient numerical techniques exist for pricing American securities depending on one or few (up to 3) risk sources. They are either latticebased techniques or finite difference approximations of the BlackScholes diffusion equation. However, these methods cannot be used for highdimensional problems, since their memory requirement is exponential in the