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Mon, 08 Dec 2014 08:41:35 +0200Mon, 08 Dec 2014 08:41:35 +0200Option-implied information and predictability of extreme returns : [Version 24 September 2012]
http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/34799
We study whether option-implied conditional expectation of market loss due to tail events, or tail loss measure, contains information about future returns, especially the negative ones. Our tail loss measure predicts future market returns, magnitude, and probability of the market crashes, beyond and above other option-implied variables. Stock-specific tail loss measure predicts individual expected returns and magnitude of realized stock-specific crashes in the cross-section of stocks. An investor, especially the one who cares about the left tail of her wealth distribution (e.g., disappointment-averse), benefits from using the tail loss measure as an information variable to construct managed portfolios of a risk-free asset and market index. The tail loss measure is motivated by the results of the extreme value theory, and it is computed from observed prices of out-of-the-money put as the risk-neutral expected value of a loss beyond a given relative threshold.Grigory Vilkov; Yan Xiaoreporthttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/34799Tue, 12 Aug 2014 08:41:35 +0200Granularity of corporate debt : [Version 10 März 2014]
http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/34385
We study the dispersion of debt maturities across time, which we call "granularity of corporate debt,'' using a model in which a firm's inability to roll over expiring debt causes inefficiencies, such as costly asset sales or underinvestment. Since multiple small asset sales are less costly than a single large one, firms diversify debt rollovers across maturity dates. We construct granularity measures using data on corporate bond issuers for the 1991-2012 period and establish a number of novel findings. First, there is substantial variation in granularity in that we observe both very concentrated and highly dispersed maturity structures. Second, observed variation in granularity supports the model's predictions, i.e. maturities are more dispersed for larger and more mature firms, for firms with better investment oppoJaewon Choi; Dirk Hackbarth; Josef Zechnerreporthttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/34385Mon, 11 Aug 2014 13:31:45 +0200Granularity of corporate debt : [Version 9 Mai 2013]
http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/32503
We study to what extent firms spread out their debt maturity dates across time, which we call "granularity of corporate debt." We consider the role of debt granularity using a simple model in which a firm's inability to roll over expiring debt causes inefficiencies, such as costly asset sales or underinvestment. Since multiple small asset sales are less costly than a single large one, firms may diversify debt rollovers across maturity dates. We construct granularity measures using data on corporate bond issuers for the 1991-2011 period and establish a number of novel findings. First, there is substantial variation in granularity in that many firms have either very concentrated or highly dispersed maturity structures. Second, our model's predictions are consistent with observed variation in granularity. Corporate debt maturities are more dispersed for larger and more mature firms, for firms with better investment opportunities, with higher leverage ratios, and with lower levels of current cash flows. We also show that during the recent financial crisis especially firms with valuable investment opportunities implemented more dispersed maturity structures. Finally, granularity plays an important role for bond issuances, because we document that newly issued corporate bond maturities complement pre-existing bond maturity profiles.Jaewon Choi; Dirk Hackbarth; Josef Zechnerworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/32503Tue, 17 Dec 2013 08:23:01 +0100Option-implied information and predictability of extreme returns : [Version 28 Januar 2013]
http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/29374
We study whether prices of traded options contain information about future extreme market events. Our option-implied conditional expectation of market loss due to tail events, or tail loss measure, predicts future market returns, magnitude, and probability of the market crashes, beyond and above other option-implied variables. Stock-specific tail loss measure predicts individual expected returns and magnitude of realized stock-specific crashes in the cross-section of stocks. An investor that cares about the left tail of her wealth distribution benefits from using the tail loss measure as an information variable to construct managed portfolios of a risk-free asset and market index. Grigory Vilkov; Yan Xiaoworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/29374Thu, 18 Apr 2013 07:47:38 +0200Price discovery in spot and futures markets : a reconsideration
http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/7385
We reconsider the issue of price discovery in spot and futures markets. We use a threshold error correction model to allow for arbitrage operations to have an impact on the return dynamics. We estimate the model using quote midpoints, and we modify the model to account for time-varying transaction costs. We find that the futures market leads in the process of price discovery. The lead of the futures market is more pronounced in the presence of arbitrage signals. Thus, when the deviation between the spot and the futures market is large, the spot market tends to adjust to the futures market. Keywords: Futures Markets , Threshold Error Correction , Information Shares , Common Factor Weights Erik Theissenworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/7385Wed, 13 Jan 2010 15:22:47 +0100What is the impact of stock market contagion on an investor's portfolio choice?
http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/6245
Stocks are exposed to the risk of sudden downward jumps. Additionally, a crash in one stock (or index) can increase the risk of crashes in other stocks (or indices). Our paper explicitly takes this contagion risk into account and studies its impact on the portfolio decision of a CRRA investor both in complete and in incomplete market settings. We find that the investor significantly adjusts his portfolio when contagion is more likely to occur. Capturing the time dimension of contagion, i.e. the time span between jumps in two stocks or stock indices, is thus of first-order importance when analyzing portfolio decisions. Investors ignoring contagion completely or accounting for contagion while ignoring its time dimension suffer large and economically significant utility losses. These losses are larger in complete than in incomplete markets, and the investor might be better off if he does not trade derivatives. Furthermore, we emphasize that the risk of contagion has a crucial impact on investors' security demands, since it reduces their ability to diversify their portfolios.Nicole Branger; Holger Kraft; Christoph Meinerdingworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/6245Fri, 13 Mar 2009 11:20:38 +0100Pro-rata matching and one-tick futures markets
http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/6182
We find and describe four futures markets where the bid-ask spread is bid down to the fixed price tick size practically all the time, and which match counterparties using a pro-rata rule. These four markets´ offered depths at the quotes on average exceed mean market order size by two orders of magnitude, and their order cancellation rates (the probability of any given offered lot being cancelled) are significantly over 96 per cent. We develop a simple theoretical model to ex- plain these facts, where strategic complementarities in the choice of limit order size cause traders to risk overtrading by submitting over-sized limit orders, most of which they expect to cancel.Jonathan Field; Jeremy Largeworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/6182Thu, 29 Jan 2009 11:32:08 +0100A partially linear approach to modelling the dynamics of spot and futures prices
http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/85
In this paper we consider the dynamics of spot and futures prices in the presence of arbitrage. We propose a partially linear error correction model where the adjustment coefficient is allowed to depend non-linearly on the lagged price difference. We estimate our model using data on the DAX index and the DAX futures contract. We find that the adjustment is indeed nonlinear. The linear alternative is rejected. The speed of price adjustment is increasing almost monotonically with the magnitude of the price difference.Jürgen Gaul; Erik Theissenworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/85Fri, 11 Apr 2008 11:21:27 +0200The valuation of employee stock options : how good is the standard?
http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/3710
This study contributes to the valuation of employee stock options (ESO) in two ways: First, a new pricing model is presented, admitting a major part of calculations to be solved in closed form. Designed with a focus on good replication of empirics, the model fits with publicly observable exercise characteristics better than earlier models. In particular, it is able to account for the correlation of the time of exercise and the stock price at exercise, suspected of being crucial for the option value. The impact of correlation is weak, however, whereas cancellations play a central role. The second contribution of this paper is an examination to what extent the ESO pricing method of SFAS 123 is subject to discretion of the accountant. Given my model were true, the SFAS price would be a good proxy. Yet, outside shareholders usually cannot observe one of the SFAS input parameters. On behalf of an example I show that there is wide latitude left to the accountant.Peter Raupachworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/3710Thu, 06 Oct 2005 15:08:11 +0200The valuation of employee stock options : how good is the standard?
http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/3709
This study contributes to the valuation of employee stock options (ESO) in two ways: First, a new pricing model is presented, admitting a major part of calculations to be solved in closed form. Designed with a focus on good replication of empirics, the model fits with publicly observable exercise characteristics better than earlier models. In particular, it is able to account for the correlation of the time of exercise and the stock price at exercise, suspected of being crucial for the option value. The impact of correlation is weak, however, whereas cancellations play a central role. The second contribution of this paper is an examination to what extent the ESO pricing method of SFAS 123 is subject to discretion of the accountant. Given my model were true, the SFAS price would be a good proxy. Yet, outside shareholders usually cannot observe one of the SFAS input parameters. On behalf of an example I show that there is wide latitude left to the accountant.Peter Raupachworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/3709Thu, 06 Oct 2005 15:01:43 +0200Is jump risk priced? - What we can (and cannot) learn from option hedging errors : [This version: November 26, 2004]
http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/3711
When options are traded, one can use their prices and price changes to draw inference about the set of risk factors and their risk premia. We analyze tests for the existence and the sign of the market prices of jump risk that are based on option hedging errors. We derive a closed-form solution for the option hedging error and its expectation in a stochastic jump model under continuous trading and correct model specification. Jump risk is structurally different from, e.g., stochastic volatility: there is one market price of risk for each jump size (and not just \emph{the} market price of jump risk). Thus, the expected hedging error cannot identify the exact structure of the compensation for jump risk. Furthermore, we derive closed form solutions for the expected option hedging error under discrete trading and model mis-specification. Compared to the ideal case, the sign of the expected hedging error can change, so that empirical tests based on simplifying assumptions about trading frequency and the model may lead to incorrect conclusions.Nicole Branger; Christian Schlagworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/3711Thu, 06 Oct 2005 13:28:35 +0200When are static superhedging strategies optimal?
http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/3707
This paper deals with the superhedging of derivatives and with the corresponding price bounds. A static superhedge results in trivial and fully nonparametric price bounds, which can be tightened if there exists a cheaper superhedge in the class of dynamic trading strategies. We focus on European path-independent claims and show under which conditions such an improvement is possible. For a stochastic volatility model with unbounded volatility, we show that a static superhedge is always optimal, and that, additionally, there may be infinitely many dynamic superhedges with the same initial capital. The trivial price bounds are thus the tightest ones. In a model with stochastic jumps or non-negative stochastic interest rates either a static or a dynamic superhedge is optimal. Finally, in a model with unbounded short rates, only a static superhedge is possible.Nicole Branger; Angelika Esser; Christian Schlagworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/3707Thu, 06 Oct 2005 13:21:54 +0200Can tests based on option hedging errors correctly identify volatility risk premia?
http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/3704
Tests for the existence and the sign of the volatility risk premium are often based on expected option hedging errors. When the hedge is performed under the ideal conditions of continuous trading and correct model specification, the sign of the premium is the same as the sign of the mean hedging error for a large class of stochastic volatility option pricing models. We show, however, that the problems of discrete trading and model mis-specification, which are necessarily present in any empirical study, may cause the standard test to yield unreliable results.Nicole Branger; Christian Schlagworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/3704Thu, 06 Oct 2005 11:45:00 +0200Tractable hedging - an implementation of robust hedging strategies : [This Version: March 30, 2004]
http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/3723
This paper provides a theoretical and numerical analysis of robust hedging strategies in diffusion–type models including stochastic volatility models. A robust hedging strategy avoids any losses as long as the realised volatility stays within a given interval. We focus on the effects of restricting the set of admissible strategies to tractable strategies which are defined as the sum over Gaussian strategies. Although a trivial Gaussian hedge is either not robust or prohibitively expensive, this is not the case for the cheapest tractable robust hedge which consists of two Gaussian hedges for one long and one short position in convex claims which have to be chosen optimally.Nicole Branger; Antje Mahayniworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/3723Thu, 06 Oct 2005 08:51:28 +0200The cost of employee stock options . [This draft: November 13, 2003]
http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/3795
This paper determines the cost of employee stock options (ESOs) to shareholders. I present a pricing method that seeks to replicate the empirics of exercise and cancellation as good as possible. In a first step, an intensity-based pricing model of El Karoui and Martellini is adapted to the needs of ESOs. In a second step, I calibrate the model with a regression analysis of exercise rates from the empirical work of Heath, Huddart and Lang. The pricing model thus takes account for all effects captured in the regression. Separate regressions enableme to compare options for top executives with those for subordinates. I find no price differences. The model is also applied to test the precision of the fair value accounting method for ESOs, SFAS 123. Using my model as a reference, the SFAS method results in surprisingly accurate prices.Peter Raupachworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/3795Thu, 29 Sep 2005 16:17:46 +0200Over-allotment options in IPOs on Germany´s Neuer Markt : an empirical investigation
http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/4485
Over-allotment arrangements are nowadays part of almost any initial public offering. The underwriting banks borrow stocks from the previous shareholders to issue more than the initially announced number of shares. This is combined with the option to cover this short position at the issue price. We present empirical evidence on the value of these arrangements to the underwriters of initial public offerings on the Neuer Markt. The over-allotment arrangement is regarded as a portfolio of a long call option and a short position in a forward contract on the stock, which is different from other approaches presented in the literature. Given the economically substantial values for these option-like claims we try to identify benefits to previous shareholders or new investors when the company is using this instrument in the process of going public. Although we carefully control for potential endogeneity problems, we find virtually no evidence for a reduction in underpricing for firms using over-allotment arrangements. Furthermore, we do not find evidence for more pronounced price stabilization activities or better aftermarket performance for firms granting an over-allotment arrangement to the underwriting banks. First Version December 2, 2002. This Version September 28, 2003.Stefanie A. Franzke; Christian Schlagworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/4485Mon, 13 Jun 2005 09:11:36 +0200