Although traded as distinct products, caps and swaptions are linked by no-arbitrage relations through the correlation structure of interest rates. Using a string market model framework, we solve for the correlation matrix implied by the swaptions market and examine the relative valuation of caps...

This article presents a simple yet powerful new approach for approximating the value of American options by simulation. The key to this approach is the use of least squares to estimate the conditional expected payoff to the optionholder from continuation. This makes this approach readily...

This paper examines seven instances in which the market value of a parent company was less than the market value of its holdings of a publicly traded subsidiary. Efforts are made to explain this “parent company puzzle†in terms of taxes, agency costs, liquidity effects and noise trader...

We price corporate debt from a structural model of ï¬rm default. We assume that the capital market brings about efficient ï¬rm default when the continuation value of the ï¬rm falls below the value it would have after bankruptcy restructuring. This characterization of default makes the...

In this paper we make use of option pricing theory to infer about historical equity premiums. This we do by comparing the prices of an American perpetual put option computed using two different models: One is the standard model with continuous, zero expectation, Gaussian noise, the other is a...

This paper develops a new econometric method to estimate continuous time processes from discretely sampled data. This method extends the maximum likelihood technique to cases where the transition density of the process cannot be computed in closed form but can nevertheless be computed by...

We investigate the properties of mean-variance efficient portfolios when the number of assets is large. We show analytically and empirically that the proportion of assets held short converges to 50% as the number of assets grows, and the investment proportions are extreme, with several assets...

The conditions under which stockholders will be unanimous in the choice of their firm's plan for the production of goods are well-known: no technological externalities, a competitive market in the production of goods, and spanning of the marginal returns of the production process by existing...