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1 – 10 of over 3000Don M. Chance and Tung-Hsiao Yang
In some contexts, this illiquidity of executive stock options is referred to as non-transferability. In others, the problem is cast in terms of the highly concentrated portfolios…
Abstract
In some contexts, this illiquidity of executive stock options is referred to as non-transferability. In others, the problem is cast in terms of the highly concentrated portfolios that managers hold, an implication of which is that managers could not trade the options to diversify. The notion of option liquidity usually conjures up images of trading pits at the Chicago Board Options Exchange or other exchanges. The existence of an active trading pit gives a powerful visual image of liquidity, but, as evidenced by the success of electronic options exchanges such as New York's International Securities Exchange and Frankfurt's EUREX, a trading pit is hardly a requirement for liquidity. The existence of a guaranteed market for standardized options as implied by options exchanges (whether pit-based or electronic) further gives a misleading appearance of high liquidity. There is also a very large market for customized over-the-counter options. It is a misconception to think that these options are not liquid when they are simply not standardized. If an investor can create a highly customized long position in an option, that investor should be able to create a highly customized short position in the same option at a later date before expiration. If both options are created through the same dealer, they will usually be treated as an offset, as they would if they were standardized options clearing through a clearinghouse. If the two transactions are not with the same dealer, they would both remain alive, but the market risks would offset. Only the credit risk, a factor we ignore in this paper, would remain. Hence, these seemingly illiquid options are, for all practical purposes, liquid.2
Michaeline Skiba, Donald R. Smith and Kimball P. Marshall
Taking an innovative theoretical approach, the purpose of this paper is to apply Merton's theory of anomia as personal reactions to social disruptions to white‐collar worker…
Abstract
Purpose
Taking an innovative theoretical approach, the purpose of this paper is to apply Merton's theory of anomia as personal reactions to social disruptions to white‐collar worker reactions to being unemployed or under‐employed.
Design/methodology/approach
Exploratory, quantitative, secondary data analysis using data collected from convenience samples of career‐disrupted, white‐collar workers in four community and church based outplacement support groups. Recognizing career‐disruption as a potentially anomic state, factor analysis was used to develop scales suggestive of Merton's categories of reactions to anomia, and cluster analysis was used to classify respondents into Merton's categories.
Findings
Exploratory scales developed and resulting cluster analyses suggest Merton's theory may be helpful in recognizing different white‐collar work reactions to career displacement.
Research limitations/implications
Secondary analysis and convenience sample data are major limitations, but results justify a call for further research into the application of Merton's categories of reactions to anomia to displaced white‐collar workers.
Practical implications
Given the frequent shifts in the business environment, white‐collar career disruptions will remain a frequent concern for senior management officers charged with administering layoffs and outplacement programs. Insights suggested by these analyses may aid anticipation of reactions of displaced white‐collar workers in ways that may influence placement and counseling activities related to worker adjustments.
Originality/value
This study is unique in applying Merton's theory of anomia to career disruptions, although Merton himself illustrated the theory with reference to workplace situations.
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Shiraz Durrani and Elizabeth Smallwood
Describes the approach taken by Merton Library and Heritage Service, part of the London Borough of Merton, to address equalities in a meaningful way. It examines aspects of…
Abstract
Describes the approach taken by Merton Library and Heritage Service, part of the London Borough of Merton, to address equalities in a meaningful way. It examines aspects of service delivery and the changing staffing structure. Without appropriate structures and policies to address equality matters, no fundamental change, required for the creation of a service based on principles of social justice, can occur. The underlying vision and philosophy are examined. It has been written for use within the service and to inform others of the successes and failures to date. Based on the experience of the process of change to date, a list is provided of key requirements for creating a service based on principles of equality.
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Khushbu Agrawal and Yogesh Maheshwari
– The purpose of this paper is to assess the significance of the Merton distance-to-default (DD) in predicting defaults for a sample of listed Indian firms.
Abstract
Purpose
The purpose of this paper is to assess the significance of the Merton distance-to-default (DD) in predicting defaults for a sample of listed Indian firms.
Design/methodology/approach
The study uses a matched pair sample of defaulting and non-defaulting listed Indian firms. It employs two alternative statistical techniques, namely, logistic regression and multiple discriminant analysis.
Findings
The option-based DD is found to be statistically significant in predicting defaults and has a significantly negative relationship with the probability of default. The DD retains its significance even after the addition of Altman’s Z-score. This further establishes its robustness as a significant predictor of default.
Originality/value
The study re-establishes the utility of the Merton model in India using a simplified version of the Merton model that can be easily operationalized by practitioners, reasonably larger sample size and is done in a more recent period covering the post global financial crisis period. The findings could be valuable to banks, financial institutions, investors and managers.
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The article argues for the necessity of theory within sociology, in general, and metatheory, in particular. It explores how theoretical, metatheoretical, and philosophical…
Abstract
The article argues for the necessity of theory within sociology, in general, and metatheory, in particular. It explores how theoretical, metatheoretical, and philosophical background conditions affect sociological research. It makes the case for why attending to background conditions is important for both the sociologist as an individual and also sociology as a collective and a discipline. In this context, it makes the case for critical realism as a useful program of metatheoretical reflexivity that focuses upon the more philosophical dimensions of sociology including the place of ontology and even how theory itself should be understood.
The purpose of this paper is to offer a “how to” guide for applying Merton’s (1987) valuation adjustment for incomplete information, which depends on market capitalization…
Abstract
Purpose
The purpose of this paper is to offer a “how to” guide for applying Merton’s (1987) valuation adjustment for incomplete information, which depends on market capitalization, idiosyncratic risk and extent of investor ownership.
Design/methodology/approach
The paper illustrates Bodnaruk and Ostberg’s (2009) formula for Merton’s adjustment, and presents some example empirical estimates of the adjustment for some US stocks.
Findings
The adjustment estimates are material for many example stocks, particularly volatile stocks with a low percentage of shares held by institutional funds. However, the adjustment estimates are modest for many other stocks, including some smaller cap. stocks.
Research limitations/implications
Measuring the model’s inputs requires using some judgment, particularly regarding the investor ownership variable. The paper will hopefully help stimulate useful empirical research on adjustment estimates and on best practices for applying the model.
Practical implications
The paper may encourage more use of the incomplete-information adjustment in practice, which should lead to improved discount rate estimates in valuation analyses.
Originality/value
No other “bridge the gap” coverage of the incomplete-information adjustment is available in textbooks or the applied literature.
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Maximilian Bär, Nadine Gatzert and Jochen Ruß
The aim of this paper is to modify the shape of utility functions traditionally used in expected utility theory (EUT) to derive optimal retirement saving decisions. Inspired by…
Abstract
Purpose
The aim of this paper is to modify the shape of utility functions traditionally used in expected utility theory (EUT) to derive optimal retirement saving decisions. Inspired by current reference point based approaches, the authors argue that utility functions with jumps or kinks at certain threshold points might very well be rational.
Design/methodology/approach
The authors suggest an alternative to typical utility functions used in EUT, to be applied in the context of retirement saving decisions. The authors argue that certain elements that are used to model biases in behavioral models should–in the context of optimal retirement saving decisions–be considered “rational” and hence be included in a normative setting as well. The authors compare the optimal asset allocation derived under such utility functions with results under traditional power utility.
Findings
The authors find that the considered threshold levels can have a significant impact on the optimal investment decision for some individuals. In particular, the authors show that a much riskier investment than under EUT can become optimal if some level of income is secured by a social security and a significant portion of the distribution of terminal wealth lies below this level.
Originality/value
Contrary to previous work, this model is especially designed to assess the question of optimal product choice/asset allocation in the specific setting of retirement planning and from a normative point of view. In this regard, the authors first motivate the use of several thresholds and then apply this approach in a capital market model with stochastic stocks and stochastic interest rates to two illustrative investment alternatives.
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The purpose of this paper is to investigate empirically the forecasting performance of jump-diffusion option pricing models of (Merton and Bates) with the benchmark Black–Scholes…
Abstract
Purpose
The purpose of this paper is to investigate empirically the forecasting performance of jump-diffusion option pricing models of (Merton and Bates) with the benchmark Black–Scholes (BS) model relative to market, for pricing Nifty index options of India. The specific period chosen for this study canvasses the extreme up and down limits (jumps) of the Indian capital market. In addition, equity markets keep on facing high and low tides of financial flux amid new economic and financial considerations. With this backdrop, the paper focuses on finding an impeccable option-pricing model which can meet the requirements of option traders and practitioners during tumultuous periods in the future.
Design/methodology/approach
Envisioning the fact, the all option-pricing models normally does wrong valuation relative to market. For estimating the structural parameters that governs the underlying asset distribution purely from the underlying asset return data, we have used the nonlinear least-square method. As an approach, we analyzed model prices by dividing the option data into 15 moneyness-maturity groups – depending on the time to maturity and strike price. The prices are compared analytically by continuously updating the parameters of two models using cross-sectional option data on daily basis. Estimated parameters then used to figure out the forecasting performance of models with corresponding BS and market – for pricing day-ahead option prices and implied volatility.
Findings
The outcomes of the paper reveal that the jump-diffusion models are a better substitute of classical BS, thus improving the pricing bias significantly. But compared to jump-diffusion model of Merton’s, the model of Bates’ can be applied more uniquely to find out the pricing of three popularly traded categories: deep-out-of-the-money, out-of-the-money and at-the-money of Nifty index options.
Practical implications
The outcome of this research work reveals that the jumps are important components of pricing dynamics of Nifty index options. Incorporation of jump-diffusion process into option pricing of Nifty index options leads to a higher pricing effectiveness, reduces the pricing bias and gives values closer to the market. As the models have been tested in extreme conditions to determine the dominant effectuality, the outcome of this paper helps traders in keeping the investment protected under normal conditions.
Originality/value
The specific period chosen for this study is very unique; it canvasses the extreme up and down limits (jumps) of the Indian capital market and provides the most apt situation for testifying the pricing competitiveness of the models in question. To testify the robustness of models, they have been put into a practical implication of complete cycle of financial frame.
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An investor in a corporate obligation is exposed to the default risk of the obligor. In this article, the author adapts the dynamic valuation framework to disaggregate systematic…
Abstract
An investor in a corporate obligation is exposed to the default risk of the obligor. In this article, the author adapts the dynamic valuation framework to disaggregate systematic and idiosyncratic default risk of credit instruments. By articulating the distinction between diversifiable and undiversifiable risk, the article develops a two‐factor model for pricing default risk.