The behavior of a hedge-fund manager naturally depends on her compensation scheme, her preferences, and constraints on her risk-taking. We propose a numerical method which can be used to analyze the impact of these influences. The model leads to several interesting and novel results concerning...

We model a firm's value process controlled by a manager maximizing expected utility from restricted shares and employee stock options. Conditioning on his optimal behavior, we value derivatives on that controlled process. Control results in a longer expected time to exercise for the manager's...

Previous papers have argued that trading restrictions can result in a typical employee stock option having a subjective value (certainty equivalent value) that is substantially less than its Black-Scholes value. However, these analyses ignore the manager's ability to (at least partially) control...

The volatility smile changed drastically around the crash of 1987 and new option pricing models have been proposed in order to accommodate that change. Deterministic volatility models allow for more flexible volatility surfaces but refrain from introducing additional risk-factors. Thus, options...

A relationship exists between aggregate risk-neutral and subjective probability distributions and risk aversion functions. We empirically derive risk aversion functions implied by option prices and realized returns on the Samp;P500 index simultaneously. These risk aversion functions dramatically...

Based on the typical positions of S&P 500 option market makers, we derive a funding illiquidity measure from quoted prices of S&P 500 derivatives. Our measure significantly affects the returns of leveraged managed portfolios; hedge funds with negative exposure to changes in funding illiquidity...

We suggest a new measure to evaluate hedge funds - relative alpha. It links each hedge fund to a group of its peers in a straightforward, semi-parametric way. We allow for omitted factors, yet do not require knowledge of the true factor structure nor do we need to estimate any factor model. We...

Asymmetric volatility concerns the relation of returns to future expected volatility. Much is known from option prices about the marginal risk-neutral distributions of S&P 500 returns and of relative changes in future expected volatility (VIX). While the bivariate risk-neutral distribution...

Widespread violations of stochastic dominance by 1-month Samp;P 500 index call options over 1986-2006 imply that a trader can improve expected utility by engaging in a zero-net-cost trade net of transaction costs and bid-ask spread. Although precrash option prices conform to the...

Widespread violations of stochastic dominance by one-month Samp;P 500 index call options over 1986-2006 imply that a trader can improve expected utility by engaging in a zero-net-cost trade net of transaction costs and bid-ask spread. Although pre-crash option prices conform to the...