Implementing Option Pricing Models When Asset Returns Are Predictable

The predictability of an asset's returns will affect the prices of options on that asset, even though predictability is typically induced by the drift, which does not enter the option pricing formula. For discretely-sampled data, predictability is linked to the parameters that do enter the option pricing formula. We construct an adjustment for predictability to the Black-Scholes formula and show that this adjustment can be important even for small levels of predictability, especially for longer maturity options. We propose several continuous-time linear diffusion processes that can capture broader forms of predictability, and provide numerical examples that illustrate their importance for pricing options.     

Binomial Option Pricing with Skewed Asset Returns

This research presents a method for estimating the parameters of the binomial option pricing model necessary to appropriately price calls on assets with asymmetric end-of-period return distributions. Parameters of the binomial model are shown to be a function of the mean, variance, and skewness of the underlying return distribution. It is also shown that failure to incorporate skewness results in the mispricing of the call.     

Pricing Options on an Asset with Bernoulli Jump-Diffusion Returns

The price movements of certain assets can be modeled by stochastic processes that combine continuous diffusion with discrete jumps. This paper compares values of options on assets with no jumps, jumps of fixed size, and jumps drawn from a lognormal distribution. It is shown that not only the magnitude but also the direction of the mispricing of the Black-Scholes model relative to jump models can vary with the distribution family of the jump component. This paper also discusses a methodology for the numerical valuation, via a backward induction algorithm, of American options on a jump-diffusion asset whose early exercise may be profitable. These cannot, in general, be accurately priced using analytic models. The procedure has the further advantage of being easily adaptable to nonanalytic, empirical distributions of period returns and to nonstationarity in the underlying diffusion process.     

Lease Valuation When Taxable Earnings Are a Scarce Resource

In this paper, we examine leasing as a tax-arbitrage instrument. Analysis of a sample of UK leases presented in this paper suggests that lessors earn large positive NPVs. Our theoretical model seeks to explain these positive NPVs in terms of a market price for a scarce resource that we identify as scarce taxable earnings. Using these prices, the model permits a lessor to determine whether the profitability of a proposed set of lease contracts can be improved by writing a different set of contracts that makes better use of the lessor's taxable earnings. There may be two reasons why an initial portfolio of contracts may be suboptimal. Either there may be clienteles or the leasing market may be inefficient. Subsequently, we discuss reasons why the leasing market may be characterized by clienteles, and, using two different samples of leases, we test whether the leasing market is segmented and efficient.     

Real Options, Product Market Competition, and Asset Returns

We study how competition in the product market affects the link between firms' real investment decisions and their asset return dynamics. In our model, assets in place and growth options have different sensitivities to market wide uncertainty. The strategic behavior of market participants influences the relative importance of these components of firm value. We show that the relationship between the degree of competition and assets' expected rates of return varies with product market demand. When demand is low, firms in more competitive industries earn higher returns, whereas when demand is high firms in more concentrated industries earn higher returns.     

The Valuation of Volatility Options

This paper examines the valuation of European- and American-style volatilityoptions based on a general equilibrium stochastic volatility framework.Properties of the optimal exercise region and of the option price areprovided when volatility follows a general diffusion process. Explicitvaluation formulas are derived in four particular cases. Emphasis is placedon the MRLP (mean-reverting in the log) volatility model which has receivedconsiderable empirical support. In this context we examine the propertiesand hedging behavior of volatility options. Unlike American options,European call options on volatility are found to display concavity at highlevels of volatility.     

Option Valuation and Hedging Strategies with Jumps in the Volatility of Asset Returns

We develop a model in which the volatility of risky assets is subject to random and discontinuous shifts over time. We derive prices of claims contingent on such assets and analyze options-based trading strategies to hedge against the risk of jumps in the return volatility. Unsystematic and systematic events such as takeovers, major changes in business plans, or shifts in economic policy regimes may drastically alter firms' risk profiles. Our model captures the effect of such events on options markets.     

Valuation of the Firm's Liabilities When Equity Holders Are Also Creditors

Abstract:  This paper presents a tractable structural model whereby controlling equity holders are also among the creditors of the firm. As the firm approaches distress, equity holders can drain the assets of the firm and expropriate other creditors by repaying their credit before bankruptcy. The right of the bankruptcy court to revoke such repayment protects arm's length creditors, reduces the cost of borrowing and induces equity holders to anticipate repayment of their credit. Equity holders decide repayment neither too early nor too late, so as to reduce the risk of repayment revocation by the bankruptcy court. Similar conclusions apply to the preferential repayment of bank loans personally guaranteed by equity holders. The analysis also suggests that callable bearer bonds may be more valuable to equity holders than to other creditors.     

Linear Accounting Valuation When Abnormal Earnings Are AR(2)

The Ohlson (1995) model assumes that abnormal earnings follow an AR(1) process primarily for reasons of mathematical tractability. However, the empirical literature on the Garman and Ohlson (1980) model finds that the data support an AR(2) lag structure for earnings, book values and dividends. Moreover, the AR(2) process encompasses a far richer variety of time series patterns than does the AR(1) process and includes the AR(1) process as a special case. This paper solves the Ohlson model directly for an AR(2) abnormal earnings dynamic. The model is estimated on a time series firm-level basis following the approach used by Myers (1999). It is found that, like the Ohlson AR(1) model, the Ohlson AR(2) model severely underestimates market prices even relative to book values. These results further bring into question the empirical validity of the Ohlson model.     

The Valuation of Options on Futures Contracts

Rational restrictions are derived for the values of American options on futures contracts. For these options, the optimal policy, in general, involves premature exercise. A model is developed for valuing options on futures contracts in a constant interest rate setting. Despite the fact that premature exercise may be optimal, the value of this American feature appears to be small and a European formula due to Black serves as a useful approximation. Finally, a model is developed to value these options in a world with stochastic interest rates. It is shown that the pricing errors caused by ignoring the location of the interest rate (relative to its long-run mean) range from ?5% to 7%, when the current rate is ±200 basis points from its long-run value. The role of interest rate expectations is, therefore, crucial to the valuation. Optimal exercise policies are found from numerical methods for both models.     

Inflation and Asset Returns in a Monetary Economy

Postwar U.S. data are characterized by negative correlations between real equity returns and inflation and by positive correlations between real equity returns and money growth. These patterns are closely matched quantitatively by an equilibrium monetary asset pricing model. The model also implies negative correlations between expected asset returns and expected inflation, and it predicts that the inflation-asset return correlation will be more strongly negative when inflation is generated by fluctuations in real economic activity than when it is generated by monetary fluctuations.     

The Effects of Inverted Yield Curves on Asset Returns

Between 1954 and 1991, U.S. stocks, long-term government bonds, and corporate bonds show negative risk premiums during periods preceded by inverted yield curves. Intermediate-term government bonds do not. Going from safer to riskier asset classes, the negative risk premiums increase in absolute value and statistical significance. The consumption CAPM offers a possible explanation for the negative risk premiums. A negative covariance between the growth rate of consumption and the premium on the risky assets will result in a negative risk premium. Empirical tests of the conditional covariance show that the consumption CAPM does not explain the phenomena.     

Is Information Risk a Determinant of Asset Returns?

We investigate the role of information–based trading in affecting asset returns. We show in a rational expectation example how private information affects equilibrium asset returns. Using a market microstructure model, we derive a measure of the probability of information–based trading, and we estimate this measure using data for individual NYSE–listed stocks for 1983 to 1998. We then incorporate our estimates into a Fama and French (1992) asset–pricing framework. Our main result is that information does affect asset prices. A difference of 10 percentage points in the probability of information–based trading between two stocks leads to a difference in their expected returns of 2.5 percent per year.     

Diagnosing Asset Pricing Models Using the Distribution of Asset Returns

This paper develops a set of diagnostic tests which can shed light on why a particular model is failing and indicate what steps might be taken to make the model consistent with asset returns. Theoretical bounds on the moments of a stochastic discount factor are derived as a function of the moments of observed asset returns. Particular attention is paid to restrictions on moments other than the variance. These bounds can also be used to measure the information about the distribution of the discount factor contained in the moments of various asset returns. As an application of this methodology, bounds on the discount factor are estimated using size-based portfolios, and the results are used to analyze the small firm effect. Empirical results indicate, for the period 1926–1975, that moments of the returns of small firms contain information about the discount factor that is not contained in the moments of the returns of large firms and/or a proxy of the aggregate wealth portfolio. However, this difference disappears when more recent data is included.     

Asset Returns and Labor Supply in a Production Economy

The introduction of an endogenous labor decision represents a challenge for models that seek to jointly explain asset pricing and business cycle facts. This paper shows that several improvements can be made if a standard real business cycle model is augmented with a novel preference specification that increases the stochastic discount factor volatility and simultaneously reduces the wealth elasticity of labor supply.     

现行市价法在林木资产评估中的运用

《森林资源资产评估技术规范(试行)》中明确指出,现行市价法是森林资源资产评估的基本方法之一.但由于目前现行市价法运用的前提条件还不够充分,所以很少被采用.但是随着林权制度改革的不断深入与活立木市场的发展,现行市价法的运用条件将日渐具备,该方法将可能成为未来森林资源资产评估的主要方法之一.本文就此方法的涵义、意义、基本程序及具体评估程序进行了阐述.     

论我国资产评估管理体制的构建

我国资产评估管理中存在着政府多头管理、政出多门，评估法律法规不健全、不统一，评估缺乏一套完整系统的评估准则体系等问题。为了适应改革开放及我国加入WTO的要求，必须构建新的资产评估管理体制，即资产评估协会各司其职、相互协调，并以行业协会为管理主体。