Traditional stock option grant is the most common form of incentive pay in executive compensation. Applying a principal-agent analysis, we find this common practice suboptimal and firms are better off linking incentive pay to average stock prices. Among other benefits, averaging reduces...

Britten-Jones and Neuberger (2000) derived a model-free implied volatility under the diffusion assumption. In this article, we extend their model-free implied volatility to asset price processes with jumps and develop a simple method for implementing it using observed option prices. In addition,...

Existing research examines the impact of volatility shocks on the relative pricing of long-term vs. short-term options and documents patterns of short-horizon underreaction and long-horizon overreaction in the options market. These studies, however, rely on implied volatilities derived from...

This paper examines the impact of mandatory option expensing on executive compensation. Although it merely changes the way option costs are disclosed (in footnotes or expensed in income statement), mandatory option expensing may actually alter the optimal contract between firms and their CEOs....

Using a utility-maximization framework, I show that the incentive to increase stock price does not always increase as more options are granted. Keeping the total cost of his compensation fixed, granting more options creates greater incentives to increase stock price only if option wealth does...

Empirical immunization studies have considered the efficacy of immunization strategies in which the durations of assets and of liabilities are equated against a strategy involving maturity matching. However all these studies have ignored tax effects. In the presence of tax-clientele effects...

Implied binomial trees are typically constructed by fitting a risk-neutral density (in the form of ending nodal probabilities) to observed option prices (e.g., Rubinstein [1994]). This commonly used approach requires the solution of a high dimensional quadratic program with the number of...

There has been a surge in the use of option-implied moments (e.g., volatility, skewness and kurtosis) in various empirical applications such as volatility forecasting, variance risk premium, empirical asset pricing, and portfolio selection. One potential obstacle in such applications is the...

This paper examines pricing in the market for depositary receipts, securities designed to track the performance of a stock index that trade like shares of stock. Arbitrage costs are low because these assets have low fundamental risk, low transactions costs, and high dividend yields. We find that...

The Chicago Board Options Exchange (CBOE) recently redesigned its widely followed VIX volatility index. While the new VIX is conceptually more appealing than its predecessor, the CBOE's implementation of the index is flawed. Using option prices simulated under typical market conditions, we show...