This article develops a discrete‐time, risk‐neutral valuation relation (RNVR) for the pricing of contingent claims when preferences in the economy are characterized by decreasing absolute risk aversion and the marginal distribution of the underlying is an inverse coshnormal. The RNVR is...

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...

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...

I study a new class of investment options, event-contingent options. These are options to invest and divest in projects that are dependent on other projects of the same firm or that are conditioned by projects of other firms in its value chain. I construct payoff functions and derive closed-form...

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 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...