Many valuation models in financial economics are developed using the pricing kernel approach to adjust for risk through the equivalent martingale representation. Often it is assumed, explicitly or implicitly, that the pricing kernel exhibits constant elasticity with respect to the price of the...

In this paper, we derive an equilibrium in which some investors buy call/put options on the market portfolio while others sell them. Since investors are assumed to have similar risk-averse preferences, the demand for these contracts is not explained by differences in the shape of utility...

We derive a no-arbitrage model of the term structure in which any two futures rates act as factors. The term structure shifts and tilts as the factor rates vary. The cross-sectional properties of the model derive from the solution of a two-dimensional ARMA process for the short rate which...

The Geske-Johnson approach provides an efficient and intuitively appealing technique for the valuation and hedging of American-style contingent claims. Here, we generalize their approach to a stochastic-interest-rate-economy. The method is implemented using options exercisable on one of a finite...

We value American options on bonds using the Geske-Johnsan (1992). The method requires the valuation of European options with two and three possible exercise dates.It is shown that a risk-neutral valuation relationship along the lines of Black-Scholes (1973) model holds for option exercisable on...

We build a multi-factor, no-arbitrage model of the term structure of spot interest rates. The stochastic factors are the short-term interest rate and the premia of the futures rates over the short-term interest rates. In the three-factor version of the model, for example, the first factor is the...

We derive general properties of two-factor models of the term structure of interest rates and, in particular, the process for futures prices and rates. Then, as a special case, we derive a no-arbitrage model of the term structure in which any two futures rates act as factors. The term structure...

We build a multi-factor model of the term structure of spot interest rates. The stochastic factors are the short-term interest rate and the premia of the future rates over the short-term interest rate. In the three-factor version of the model, for example, the first-factor is the three month...

We consider the demand for state contingent claims in the presence of a zero-mean, non-hedgeable background risk. An agent is defined to be generalized risk averse if he/she reacts to an increase in background risk by choosing a demand function for contingent claims with a smaller slope. We show...

We derive general properties of two-factor models of the term structure of interestrates and, in particular, the process for futures prices and rates. Then, as a special case, we derive a no-arbitrage model of the term structure in which any two futures rates act as factors. In this model, the...