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1 – 10 of over 3000Bong-Gyu Jang and Hyeng Keun Koo
We present an approach for pricing American put options with a regime-switching volatility. Our method reveals that the option price can be expressed as the sum of two components…
Abstract
We present an approach for pricing American put options with a regime-switching volatility. Our method reveals that the option price can be expressed as the sum of two components: the price of a European put option and the premium associated with the early exercise privilege. Our analysis demonstrates that, under these conditions, the perpetual put option consistently commands a higher price during periods of high volatility compared to those of low volatility. Moreover, we establish that the optimal exercise boundary is lower in high-volatility regimes than in low-volatility regimes. Additionally, we develop an analytical framework to describe American puts with an Erlang-distributed random-time horizon, which allows us to propose a numerical technique for approximating the value of American puts with finite expiry. We also show that a combined approach involving randomization and Richardson extrapolation can be a robust numerical algorithm for estimating American put prices with finite expiry.
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Nisha, Neha Puri, Namita Rajput and Harjit Singh
The purpose of this study is to analyse and compile the literature on various option pricing models (OPM) or methodologies. The report highlights the gaps in the existing…
Abstract
Purpose
The purpose of this study is to analyse and compile the literature on various option pricing models (OPM) or methodologies. The report highlights the gaps in the existing literature review and builds recommendations for potential scholars interested in the subject area.
Design/methodology/approach
In this study, the researchers used a systematic literature review procedure to collect data from Scopus. Bibliometric and structured network analyses were used to examine the bibliometric properties of 864 research documents.
Findings
As per the findings of the study, publication in the field has been increasing at a rate of 6% on average. This study also includes a list of the most influential and productive researchers, frequently used keywords and primary publications in this subject area. In particular, Thematic map and Sankey’s diagram for conceptual structure and for intellectual structure co-citation analysis and bibliographic coupling were used.
Research limitations/implications
Based on the conclusion presented in this paper, there are several potential implications for research, practice and society.
Practical implications
This study provides useful insights for future research in the area of OPM in financial derivatives. Researchers can focus on impactful authors, significant work and productive countries and identify potential collaborators. The study also highlights the commonly used OPMs and emerging themes like machine learning and deep neural network models, which can inform practitioners about new developments in the field and guide the development of new models to address existing limitations.
Social implications
The accurate pricing of financial derivatives has significant implications for society, as it can impact the stability of financial markets and the wider economy. The findings of this study, which identify the most commonly used OPMs and emerging themes, can help improve the accuracy of pricing and risk management in the financial derivatives sector, which can ultimately benefit society as a whole.
Originality/value
It is possibly the initial effort to consolidate the literature on calibration on option price by evaluating and analysing alternative OPM applied by researchers to guide future research in the right direction.
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Three scenario-based experiments were conducted to explore the influence of the base option’s price format (just-at vs just-below) on tourists’ upgrade intention. The findings of…
Abstract
Three scenario-based experiments were conducted to explore the influence of the base option’s price format (just-at vs just-below) on tourists’ upgrade intention. The findings of this research indicated that tourists are more inclined to upgrade the option when the base option’s price is presented in a just-at condition due to the mediating role of tourists’ price perceptions of the upgrade option. This study discovered that the just-at (vs just-below) pricing strategy can lower tourists’ price perceptions of the upgrade choice. This research further explored the moderating of tourists’ mindsets. It was found the threshold-crossing effect will disappear for tourists with fixed mindsets. This study also provides practical implications for travel service providers to set up appropriate pricing strategies to attract tourists to make upgrade decisions.
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Recent studies suggested the ratio of option to stock volume reflected the private information. Informed traders were drawn to the options market for its leverage effect and…
Abstract
Purpose
Recent studies suggested the ratio of option to stock volume reflected the private information. Informed traders were drawn to the options market for its leverage effect and relatively low transaction costs. Informed traders use different intervals of option moneyness to execute their strategies. The question is which types of option moneyness were traded by informed traders and what information was reflected in the market. In this study, the authors focused on this question and constructed a method for capturing the activity of informed traders in the options and stock markets.
Design/methodology/approach
The authors constructed the daily measure, moneyness option trading volume to stock trading volume ratio (MOS), to capture the activity of informed traders in the market. The authors formed quintile portfolios sorted with respect to the moneyness option to stock trading volume ratio and provided the capital asset pricing model and Fama–French five-factor alphas. To determine whether MOS had predictive ability on future stock returns after controlling for company characteristic effects, the authors formed double-sorted portfolios and performed Fama–Macbeth regressions.
Findings
The authors found that the firms in the lowest moneyness option trading volume to stock trading volume ratio for put quintile outperform the highest quintile by 0.698% per week (approximately 36% per year). The firms in the highest moneyness option trading volume to stock trading volume ratio for call quintile outperform the lowest quintile by 0.575% per week (approximately 30% per year).
Originality/value
The authors first propose the measures, moneyness option trading volume to stock trading volume ratio, that combined with the trading volume and option moneyness. The authors provide evidence that the measures have the predictive ability to the future stock returns.
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Jan Voon and Yiu Chung Ma
This paper contributes to the literature as follows. First, it examines if option and stock compensations raise creditor's risk, and which one is more important than the other…
Abstract
Purpose
This paper contributes to the literature as follows. First, it examines if option and stock compensations raise creditor's risk, and which one is more important than the other. Second, it explores if CEO's compensation interacts with CEO overconfidence to raise creditor's risk. Third, it investigates how banks use different loan terms to alleviate their credit risk.
Design/methodology/approach
This study used advanced regression analysis and use of generalized methods of moment methodology.
Findings
The results show that option compensation is more important than stock compensation in raising credit risk; option compensation interacts with CEO overconfidence, giving rise to a much higher credit risk; and covenant usage is more important than other loan contract terms in mitigating credit risk given that covenant use could not be substituted away by using other loan contract terms such as increasing interest rate, reducing principal or shortening loan duration. This paper has practical implications for credit markets.
Research limitations/implications
The main implication is that hand-collect data are available up to 2010.
Practical implications
It informs creditors the potential sources of loan risk emanating from option rather than stock incentives; it informs creditors that option incentive interacts with CEO overconfidence rendering the credit risk bigger than expected, and it informs creditors the importance of using covenants vis-à-vis other loan contract terms for mitigating compensation and overconfidence risk.
Social implications
Banks are alerted to the risk due to the interaction between overconfidence and compensations, implying that overconfident managers remunerated with options compensations are more risky than overconfident managers who are not remunerated as such.
Originality/value
This paper is original: (1) The authors show that option compensation is more risky than stock compensation from viewpoint of creditors. This has not been assessed. (2) Interaction between managerial compensation and managerial overconfidence has not been assessed before. (3) Use of different loan contract terms to alleviate risk from overconfident managers (who are prone to over investment but who are innovative according to the literature) has not been evaluated.
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Ali I. El Saleh and Doureige J. Jurdi
Prior research shows that co-opted directors adversely impact many corporate outcomes, yet little is known about these directors' impact on CSR performance. The authors…
Abstract
Purpose
Prior research shows that co-opted directors adversely impact many corporate outcomes, yet little is known about these directors' impact on CSR performance. The authors investigate whether and how co-opted boards affect the firm's CSR score and component CSR scores.
Design/methodology/approach
The authors use panel regression models to investigate this study's research questions and address endogeneity concerns using the system generalized method of moments (system GMM) and a quasi-natural experiment.
Findings
The authors report new evidence showing that co-opted boards negatively impact CSR performance based on the CSR score. Results identify board characteristics that accentuate or moderate the effect of co-option on the CSR score and show that board independence, the presence of women on the board, and CEO duality positively and significantly impact the CSR score. These findings are robust across alternative measures of co-option and in the results of models addressing endogeneity concerns. An extended analysis utilizing CSR component scores reveals a significant negative impact of co-option on the environment component score using various measures of co-option and on employee relations, product quality, and human rights component scores using selected measures of co-option.
Practical implications
Findings have implications for board structuring and composition for firms aiming at improving their CSR score.
Originality/value
The study provides new evidence on the impact of co-opted boards on CSR performance. The results help inform stakeholders such as policymakers, executives and directors, shareholders, and capital market participants on how board composition affects socially responsible activities and performance and identify CSR component areas that require attention.
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Sedki Zaiane, Halim Dabbou and Mohamed Imen Gallali
The purpose of this study is to examine the nonlinear relationship between financial constraints and the chief executive officer (CEO) stock options compensation and to analyze…
Abstract
Purpose
The purpose of this study is to examine the nonlinear relationship between financial constraints and the chief executive officer (CEO) stock options compensation and to analyze whether the impact of financial constraints on the CEO stock options compensation changes at certain level of financial constraints or not.
Design/methodology/approach
This study is based on a sample of 90 French firms for the period extending from 2008 to 2019. To deal with the non-linearity, the authors use a panel threshold method.
Findings
Using different measures of financial constraints [KZ index (Baker et al., 2003), SA index (Hadlock and Pierce, 2010) and FCP index (Schauer et al., 2019)], the results reveal that the impact of the financial constraints (SA index and FCP index) is positive below the threshold value and it becomes negative above.
Research limitations/implications
The non-linearity between financial constraints and CEO stock options shows that the level of financial constraints can be a major determinant of the CEO compensation structure. More specifically, this study sheds light on the key role played by the level of financial constraints and how this latter influence management decisions.
Originality/value
This paper is the first to the best of the authors' knowledge to examine the nonlinear relationship between financial constraints and the CEO stock options compensation using a panel threshold model.
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The current study aims to investigate the mediating role of executive stock options in the nonlinear relationship between financial constraints and research and development (R&D…
Abstract
Purpose
The current study aims to investigate the mediating role of executive stock options in the nonlinear relationship between financial constraints and research and development (R&D) investment through two measures of financial constraints.
Design/methodology/approach
This study is based on a sample of 90 French firms for the period extending from 2008 to 2020. The authors employ a panel threshold method to analyze whether the impact of financial constraints on R&D investment depends on the level of financial constraints or not.
Findings
Using SA index (Hadlock and Pierce, 2010) and FCP index (Schauer et al., 2019) as measures of financial constraints, the authors demonstrate that the relationship between financial constraints and R&D investment is nonlinear. Moreover, the authors find that executive stock options mediate partially the relationship between financial constraints and R&D investment. More specifically, the authors show that stock options could play two roles depending on the level of the financial constraints; inconsistent mediation for firms with low/medium level of financial constraints and partial mediation for highly constrained firms.
Originality/value
This paper is the first to the best of the authors' knowledge to investigate the nonlinear relationship between financial constraints and R&D investment as well as the mediating role of executive stock option using dynamic panel threshold models.
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Dezhi Li, Lugang Yu, Guanying Huang, Shenghua Zhou, Haibo Feng and Yanqing Wang
To propose a new investment-income valuation model by real options approach (ROA) for old community renewal (OCR) projects, which could help the government attract private…
Abstract
Purpose
To propose a new investment-income valuation model by real options approach (ROA) for old community renewal (OCR) projects, which could help the government attract private capital's participation.
Design/methodology/approach
The new model is proposed by identifying the types of options private capital has in the OCR project, selecting the option model most suitable for private capital investment decisions, improving the valuation model through the triangular fuzzy numbers to take into account the uncertainty and flexibility, and demonstrating the feasibility of the calculation model through an actual OCR project case.
Findings
The new model can valuate OCR projects more accurately based on considering uncertainty and flexibility, compared with conventional methods that often underestimate the value of OCR projects.
Practical implications
The investment-income of OCR projects shall be re-valuated from the lens of real options, which could help reveal more real benefits beyond the capital growth of OCR projects, enable the government to attract private capital's investment in OCR, and alleviate government fiscal pressure.
Originality/value
The proposed OCR-oriented investment-income valuation model systematically analyzes the applicability of real option value (ROV) to OCR projects, innovatively integrates the ROV and the net present value (NPV) as expanded net present value (ENPV), and accurately evaluate real benefits in comparison with existing models. Furthermore, the newly proposed model holds the potential to be transferred to various social welfare projects as a tool to attract private capital's participation.
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Lawrence Haar, Ali Elharidy and Andros Gregoriou
International Accounting Standards Rule 37 (IAS 37) for Contingent Liabilities and Assets were designed to make analysis of exposures facing a corporate entity easier to…
Abstract
Purpose
International Accounting Standards Rule 37 (IAS 37) for Contingent Liabilities and Assets were designed to make analysis of exposures facing a corporate entity easier to understand, but the rules may be insufficiently prescriptive making provisions inadequate predictors of potential outlays. The purpose of this research is to redress this problem. We apply financial option theory to objectively mark-to-market the appropriateness of provisions replacing subjective inputs with market derived calculations.
Design/methodology/approach
This study applies financial option theory to determine whether provisions are appropriate according to market data. This research supports inferences regarding the probability of a provision being used while evidencing scope for earnings management.
Findings
In addition to showing how IAS 37 provisions may be calibrated against market data, from the large sample of UK-listed companies, the proposition that over-provisioning is common and related to share price volatility, is supported, supporting the view that IAS 37 rules may facilitate earnings management.
Practical implications
The financial and reporting community have struggled in interpreting the appropriateness of IAS 37 provisions. Are they too large or too small? What is the probability they will be used? Using option theory and market data, various subjective judgements may now be validated. This research should have tangible value to analysts, auditors, investors and other stakeholders concerned in the accurate valuation of potential liabilities.
Originality/value
Replacing subjective judgement and insufficiently prescriptive guidance, this study shows that financial option theory and share price data may be used to objectively calibrate the size of IAS 37 provisions.
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