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Pricing Equations (pricing + equation)

Distribution by Scientific Domains
Business, Economics, Finance and Accounting100%

Selected Abstracts

A two-mean reverting-factor model of the term structure of interest rates

THE JOURNAL OF FUTURES MARKETS, Issue 11 2003
Manuel Moreno
This article presents a two-factor model of the term structure of interest rates. It is assumed that default-free discount bond prices are determined by the time to maturity and two factors, the long-term interest rate, and the spread (i.e., the difference) between the short-term (instantaneous) risk-free rate of interest and the long-term rate. Assuming that both factors follow a joint Ornstein-Uhlenbeck process, a general bond pricing equation is derived. Closed-form expressions for prices of bonds and interest rate derivatives are obtained. The analytical formula for derivatives is applied to price European options on discount bonds and more complex types of options. Finally, empirical evidence of the model's performance in comparison with an alternative two-factor (Vasicek-CIR) model is presented. The findings show that both models exhibit a similar behavior for the shortest maturities. However, importantly, the results demonstrate that modeling the volatility in the long-term rate process can help to fit the observed data, and can improve the prediction of the future movements in medium- and long-term interest rates. So it is not so clear which is the best model to be used. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23: 1075,1105, 2003 [source]

Do Stock Prices Fully Reflect the Implications of Special Items for Future Earnings?

JOURNAL OF ACCOUNTING RESEARCH, Issue 3 2002
David Burgstahler
Previous research (Rendleman, Jones, and Latane [1987]; Freeman and Tse [1989]; Bernard and Thomas [1990]; and Ball and Bartov [1996]) indicates that security prices do not fully reflect predictable elements of the relation between current and future quarterly earnings. We investigate whether this finding also holds for the special items component of earnings. Given that special items are prominent in financial analysis and are assumed to have relatively straightforward implications for future earnings (special items are assumed to be largely transitory), one might expect that prices would fully impound the implications of special items for future earnings. Based on the "two-equation" approach used in Ball and Bartov [1996] and other studies (e.g., Abarbanell and Bernard [1992]; Sloan [1996]; Rangan and Sloan [1998]; and Soffer and Lys [1999]), we find that while prices reflect relatively more of the effects of special items compared to other earnings components, we still reject the null hypothesis that prices fully impound the implications of special items for future earnings. The "two-equation" approach assesses the consistency of coefficients in a pair of prediction and pricing equations, and thus depends on an assumed functional form. However, a less structured abnormal returns methodology like that used in Bernard and Thomas [1990] also supports the conclusion that the implications of special items are not fully impounded in prices. Specifically, a trading strategy based only on the sign of special items earns small but statistically significant abnormal returns during a 3-day window four quarters subsequent to the original announcement of special items. [source]

A Generalization of the Brennan,Rubinstein Approach for the Pricing of Derivatives

THE JOURNAL OF FINANCE, Issue 2 2003
António Câmara
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 normal distributions which may or may not belong to the same family of distributions. Those pricing results are particularly valuable (a) to show new sufficient conditions for existing risk-neutral option pricing equations (e.g., the Black,Scholes model), and (b) to obtain new analytical solutions for the price of European-style contingent claims when the underlying asset has a transformed normal distribution (e.g., a negatively skew lognormal distribution). [source]

Option pricing for the transformed-binomial class

THE JOURNAL OF FUTURES MARKETS, Issue 8 2006
António Câmara
This article generalizes the seminal Cox-Ross-Rubinstein (1979) binomial option pricing model to all members of the class of transformed-binomial pricing processes. The investigation addresses issues related with asset pricing modeling, hedging strategies, and option pricing. Formulas are derived for (a) replicating or hedging portfolios, (b) risk-neutral transformed-binomial probabilities, (c) limiting transformed-normal distributions, and (d) the value of contingent claims, including limiting analytical option pricing equations. The properties of the transformed-binomial class of asset pricing processes are also studied. The results of the article are illustrated with several examples. © 2006 Wiley Periodicals, Inc. Jrl. Fut Mark 26:759,787, 2006 [source]