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Adding and subtracting Black-Scholes: A new approach to approximating derivative prices in continuous-time models

Kristensen, Dennis; Mele, Antonio - In: Journal of Financial Economics 102 (2011) 2, pp. 390-415

We develop a new approach to approximating asset prices in the context of continuous-time models. For any pricing model that lacks a closed-form solution, we provide a closed-form approximate solution, which relies on the expansion of the intractable model around an “auxiliary” one. We...

Persistent link: https://www.econbiz.de/10011039202

CAPM for estimating the cost of equity capital: Interpreting the empirical evidence

Da, Zhi; Guo, Re-Jin; Jagannathan, Ravi - In: Journal of Financial Economics 103 (2012) 1, pp. 204-220

We argue that the empirical evidence against the capital asset pricing model (CAPM) based on stock returns does not … returns on stocks need not satisfy the CAPM even when expected returns of projects do. We provide empirical support for our … arguments by developing a method for estimating firms' project CAPM betas and project returns. Our findings justify the …

Persistent link: https://www.econbiz.de/10010702354

Investment shocks and the commodity basis spread

Yang, Fan - In: Journal of Financial Economics 110 (2013) 1, pp. 164-184

I identify a “slope” factor in the cross section of commodity futures returns: high-basis commodity futures have higher loadings on this factor than low-basis commodity futures. Combined with a level factor (an index of commodity futures), this slope factor explains most of the average...

Persistent link: https://www.econbiz.de/10011039220

Time series momentum

Moskowitz, Tobias J.; Ooi, Yao Hua; Pedersen, Lasse Heje - In: Journal of Financial Economics 104 (2012) 2, pp. 228-250

We document significant “time series momentum” in equity index, currency, commodity, and bond futures for each of the 58 liquid instruments we consider. We find persistence in returns for one to 12 months that partially reverses over longer horizons, consistent with sentiment theories of...

Persistent link: https://www.econbiz.de/10011039243

Arbitrage crashes and the speed of capital

Mitchell, Mark; Pulvino, Todd - In: Journal of Financial Economics 104 (2012) 3, pp. 469-490

The imminent failure of prime brokers during the 2008 financial crisis caused a sudden decrease in the leverage afforded hedge funds. This decrease resulted from the asymmetrical payoff to rehypothecation lenders—the ultimate financiers, through prime brokers, to hedge funds. Seemingly...

Persistent link: https://www.econbiz.de/10011039252

Liquidity risk of corporate bond returns: conditional approach

Acharya, Viral V.; Amihud, Yakov; Bharath, Sreedhar T. - In: Journal of Financial Economics 110 (2013) 2, pp. 358-386

We study the exposure of the US corporate bond returns to liquidity shocks of stocks and Treasury bonds over the period 1973–2007 in a regime-switching model. In one regime, liquidity shocks have mostly insignificant effects on bond prices, whereas in another regime, a rise in illiquidity...

Persistent link: https://www.econbiz.de/10011039286

Trading in derivatives when the underlying is scarce

Banerjee, Snehal; Graveline, Jeremy J. - In: Journal of Financial Economics 111 (2014) 3, pp. 589-608

Regulatory restrictions and market frictions can constrain the aggregate quantity of long and short positions in a security. When these constraints bind, we refer to the security as scarce, and its price becomes distorted relative to its value in a frictionless market. We show that an otherwise...

Persistent link: https://www.econbiz.de/10010743552

Does option trading convey stock price information?

Hu, Jianfeng - In: Journal of Financial Economics 111 (2014) 3, pp. 625-645

After executing option orders, options market makers turn to the stock market to hedge away the underlying stock exposure. As a result, the stock exposure imbalance in option transactions translates into an imbalance in stock transactions. This paper decomposes the total stock order imbalance...

Persistent link: https://www.econbiz.de/10010743556

Pricing of commercial real estate securities during the 2007–2009 financial crisis

Driessen, Joost; Van Hemert, Otto - In: Journal of Financial Economics 105 (2012) 1, pp. 37-61

We study the relative and absolute pricing of CMBX contracts (commercial real estate derivatives) during the recent financial crisis. Using a structural CMBX pricing model, we find little systematic mispricing relative to REIT equity and options. We do find short-term deviations from this...

Persistent link: https://www.econbiz.de/10010576087

The impact of central clearing on counterparty risk, liquidity, and trading: Evidence from the credit default swap market

Loon, Yee Cheng; Zhong, Zhaodong Ken - In: Journal of Financial Economics 112 (2014) 1, pp. 91-115

This paper examines the impact of central clearing on the credit default swap (CDS) market using a sample of voluntarily cleared single-name contracts. Consistent with central clearing reducing counterparty risk, CDS spreads increase around the commencement of central clearing and are lower than...

Persistent link: https://www.econbiz.de/10010752915