We investigate the preference and distribution restrictions that underlie explicit risk-neutral option valuation equations. We establish new sufficient conditions in terms of utility functions and joint distributions of assets' payoffs and state variables for these models to hold in equilibrium...

<section xml:id="fut21616-sec-0001"> This study uses equilibrium arguments to derive closed‐form solutions for the price of European call and put options written on an individual stock when shareholders might lose all their claims on the firm. The stock price accounts for both a random probability of bankruptcy and a random...</section>

This paper derives preference-free option pricing equations in a discrete time economy where asset returns have continuous distributions. There is a representative agent who has risk preferences with an exponential representation. Aggregate wealth and the underlying asset price have transformed...

This paper introduces a class of two counters of jumps option pricing models. The stock price follows a jump-diffusion process with price jumps up and price jumps down, where each type of jumps can have different means and standard deviations. Price jumps can be negatively autocorrelated as it...

This paper extends the literature on Risk-Neutral Valuation Relationships (RNVRs) to derive valuation formulae for options on zero coupon bonds when interest rates are stochastic. We develop Forward-Neutral Valuation Relationships (FNVRs) for the transformed-bounded random walk class. Our...

This article studies the cost of contingent earnings-based bonus compensation. We assume that the firm has normal and abnormal earnings. The normal earnings result from normal firm activities and are modeled as an arithmetic Brownian motion. The abnormal earnings result from surprising...

Since 1995, more than 50 percent of the firms in the "FTSE"-100 have granted rewards to their senior executives, the payoffs of which are contingent on the firm's stock return relative to a bench mark return over a given period (hereafter, relative performance incentives). This paper...

This article presents a pure exchange economy that extends Rubinstein (1976) to show how the jump-diffusion option pricing model of Merton (1976) is altered when jumps are correlated with diffusive risks. A non-zero correlation between jumps and diffusive risks is necessary in order to resolve...

This article presents a modification of Merton’s (1976) ruin option pricing model to estimate the implied probability of default from stock and option market prices. To test the model, we analyze all global financial firms with traded options in the US and focus on the subprime mortgage crisis...