Results 1  10
of
496
A closedform solution for options with stochastic volatility with applications to bond and currency options
 Review of Financial Studies
, 1993
"... I use a new technique to derive a closedform solution for the price of a European call option on an asset with stochastic volatility. The model allows arbitrary correlation between volatility and spotasset returns. I introduce stochastic interest rates and show how to apply the model to bond option ..."
Abstract

Cited by 952 (4 self)
 Add to MetaCart
I use a new technique to derive a closedform solution for the price of a European call option on an asset with stochastic volatility. The model allows arbitrary correlation between volatility and spotasset returns. I introduce stochastic interest rates and show how to apply the model to bond options and foreign currency options. Simulations show that correlation between volatility and the spot asset’s price is important for explaining return skewness and strikeprice biases in the BlackScholes (1973) model. The solution technique is based on characteristic functions and can be applied to other problems. Many plaudits have been aptly used to describe Black and Scholes ’ (1973) contribution to option pricing theory. Despite subsequent development of option theory, the original BlackScholes formula for a European call option remains the most successful and widely used application. This formula is particularly useful because it relates the distribution of spot returns I thank Hans Knoch for computational assistance. I am grateful for the suggestions of Hyeng Keun (the referee) and for comments by participants
Stock Returns and the Term Structure
 Journal of Financial Economics
, 1987
"... (Article begins on next page) The Harvard community has made this article openly available. Please share how this access benefits you. Your story matters. ..."
Abstract

Cited by 417 (21 self)
 Add to MetaCart
(Article begins on next page) The Harvard community has made this article openly available. Please share how this access benefits you. Your story matters.
Preference Parameters And Behavioral Heterogeneity: An Experimental Approach In The Health And Retirement Study
, 1997
"... This paper reports measures of preference parameters relating to risk tolerance, time preference, and intertemporal substitution. These measures are based on survey responses to hypothetical situations constructed using an economic theorist's concept of the underlying parameters. The individual ..."
Abstract

Cited by 358 (11 self)
 Add to MetaCart
This paper reports measures of preference parameters relating to risk tolerance, time preference, and intertemporal substitution. These measures are based on survey responses to hypothetical situations constructed using an economic theorist's concept of the underlying parameters. The individual measures of preference parameters display heterogeneity. Estimated risk tolerance and the elasticity of intertemporal substitution are essentially uncorrelated across individuals. Measured risk tolerance is positively related to risky behaviors, including smoking, drinking, failing to have insurance, and holding stocks rather than Treasury bills. These relationships are both statistically and quantitatively significant, although measured risk tolerance explains only a small fraction of the variation of the studied behaviors.
On estimating the expected return on the market  an exploratory investigation
 Journal of Financial Economics
, 1980
"... The expected market return is a number frequently required for the solution of many investment and corporate tinance problems, but by comparison with other tinancial variables, there has been little research on estimating this expected return. Current practice for estimating the expected market retu ..."
Abstract

Cited by 342 (2 self)
 Add to MetaCart
The expected market return is a number frequently required for the solution of many investment and corporate tinance problems, but by comparison with other tinancial variables, there has been little research on estimating this expected return. Current practice for estimating the expected market return adds the historical average realized excess market returns to the current observed interest rate. While this model explicitly reflects the dependence of the market return on the interest rate, it fails to account for the effect of changes in the level of market risk. Three models of equilibrium expected market returns which reflect this dependence are analyzed in this paper. Estimation procedures which incorporate the prior restriction that equilibrium expected excess returns on the market must be positive are derived and applied to return data for the period 19261978. The principal conclusions from this exploratory investigation are: (1) in estimating models of the expected market return, the nonnegativity restriction of the expected excess return should be explicitly included as part of the specification; (2) estimators which use realized returns should be adjusted for heteroscedasticity. 1.
and Spot Exchange Rates
 Journal qf Monetary Economics
, 1984
"... There is a general comemum that forward exchanse rates have tittle if any power as forecasts of future spot exchat ~ rateL There is less alpeentent on whether forward rates contain time varying premiumL Conditional on the bjpmlm ~ that the forward market is efficient or rational, this paper finds th ..."
Abstract

Cited by 287 (1 self)
 Add to MetaCart
There is a general comemum that forward exchanse rates have tittle if any power as forecasts of future spot exchat ~ rateL There is less alpeentent on whether forward rates contain time varying premiumL Conditional on the bjpmlm ~ that the forward market is efficient or rational, this paper finds that both components of foewa ~ rates vary through time. Moreover. most of the variation in forward rates is variatioa in premiums, and the pr~mium and expected future spot rate components of forward rates are netatively correlat.,'d I. I n ~ There is much empirical work on forward foreign exchange rates as predictors of future spot exchange rates. [See, for exmnple, Hansen and Hodrick (1980)0 Bilson (1981), and the review article by Levich (1979).] There is also a growing literature on whethm " forward rates contain variation in premiums.
Resurrecting the (C)CAPM: A CrossSectional Test When Risk Premia Are TimeVarying
 Journal of Political Economy
, 2001
"... This paper explores the ability of conditional versions of the CAPM and the consumption CAPM—jointly the (C)CAPM—to explain the cross section of average stock returns. Central to our approach is the use of the log consumption–wealth ratio as a conditioning variable. We demonstrate that such conditio ..."
Abstract

Cited by 169 (6 self)
 Add to MetaCart
This paper explores the ability of conditional versions of the CAPM and the consumption CAPM—jointly the (C)CAPM—to explain the cross section of average stock returns. Central to our approach is the use of the log consumption–wealth ratio as a conditioning variable. We demonstrate that such conditional models perform far better than unconditional specifications and about as well as the FamaFrench threefactor model on portfolios sorted by size and booktomarket characteristics. The conditional consumption CAPM can account for the difference in returns between lowbooktomarket and highbooktomarket portfolios and exhibits little evidence of residual size or booktomarket effects. We are grateful to Eugene Fama and Kenneth French for graciously providing the
Dynamic Nonmyopic Portfolio Behavior
 Review of Financial Studies
, 1996
"... The dynamic nonmyopic portfolio behavior of an investor who trades a riskfree and risky asset is derived for all HARA utility functions and a stochastic risk premium. Conditions are found for when the investor holds more or less than the myopic amount of the risky asset; hedges against or speculate ..."
Abstract

Cited by 150 (1 self)
 Add to MetaCart
The dynamic nonmyopic portfolio behavior of an investor who trades a riskfree and risky asset is derived for all HARA utility functions and a stochastic risk premium. Conditions are found for when the investor holds more or less than the myopic amount of the risky asset; hedges against or speculates the riskpremium uncertainty; is long or short on the risky asset; and holds more or less of the risky asset at longer horizons. The analytical solutions derived take multiple mathematical forms and include extreme cases in which investors with long but finite horizons can attain nirvana. In the standard paradigm of portfolio theory, the investor maximizes expected utility, with continuous or periodic revisions of his portfolio within his investment horizon. The purpose of the revisions is to adapt to shifts in wealth, interest rates, and beliefs, and to the shortening of the investor’s horizon as time passes.1 The investor’s opportunity set is defined to be the current riskfree rate and his probability beliefs for The authors would like to thank David Feldman, Robert Merton, Paul Samuelson, editor Chifu Huang, executive editor Franklin Allen, and an anonymous reviewer for their comments and suggestions. Any errors are the responsibility of the authors. Address correspondence to Edward
Consumption Strikes Back? Measuring LongRun Risk
, 2008
"... We characterize and measure a longterm riskreturn tradeoff for the valuation of cash flows exposed to fluctuations in macroeconomic growth. This tradeoff features risk prices of cash flows that are realized far into the future but continue to be reflected in asset values. We apply this analysis ..."
Abstract

Cited by 142 (19 self)
 Add to MetaCart
We characterize and measure a longterm riskreturn tradeoff for the valuation of cash flows exposed to fluctuations in macroeconomic growth. This tradeoff features risk prices of cash flows that are realized far into the future but continue to be reflected in asset values. We apply this analysis to claims on aggregate cash flows and to cash flows from value and growth portfolios by imputing values to the longrun dynamic responses of cash flows to macroeconomic shocks. We explore the sensitivity of our results to features of the economic valuation model and of the model cash flow dynamics.
Intertemporally dependent preferences and the volatility of consumption and wealth
 Review of Financial Studies
, 1989
"... In this article we construct a model in which a consumer’s utility depends on the consumption history We describe a general equilibrium framework similar to Cox, Ingersoll, and Ross (1985a). A simple example is then solved in closedform in this general equilibrium setting to rationalize the observed ..."
Abstract

Cited by 125 (3 self)
 Add to MetaCart
In this article we construct a model in which a consumer’s utility depends on the consumption history We describe a general equilibrium framework similar to Cox, Ingersoll, and Ross (1985a). A simple example is then solved in closedform in this general equilibrium setting to rationalize the observed stickiness of the consumption series relative to the fluctuations in stock market wealth. The sample paths of consumption generated from this model imply lower variability in consumption growth rates compared to those generated by models with separable utilizations. We then present a partial equilibrium model similar to Merton (1969, 1971) and extend Merton’s results on optimal consumption and portfolio rules to accommodate nonseparability in preferences. Asset pricing implications of our framework are briefly explored. The idea that a given bundle of consumption goods will provide the same level of satisfaction at any date regardless of one’s past consumption experience is implicit in models that use timeseparable utility functions to represent preferences. Separable utility functions have been the mainstay in much of the literature on asset pricing and optimal consumption and portfolio The results reported in this article were first presented at the EFA meetings in Bern, Switzerland, in 1985 [see Sundaresan (1984)]. Subsequently the article was presented at a number of universities and conferences. I thank the participants at those presentations for their feedback. I am especially thankful to Doug Breeden, Michael Brennan, John Cox, Chifu Huang, and Krishna Ramaswamy for their thoughtful comments and criticisms. I also thank Tongsheng Sun for explaining the simulation procedure for stochastic differential equations and for his comments and suggestions. I am responsible for any remaining errors. Correspondence should be sent to Suresh M. Sundaresan, Graduate
On The Estimation Of BetaPricing Models
 Review of Financial Studies
, 1992
"... This paper is an extension of the second chapter of my doctoral dissertation at CarnegieMellon University. Recent versions were presented in seminars ..."
Abstract

Cited by 120 (7 self)
 Add to MetaCart
This paper is an extension of the second chapter of my doctoral dissertation at CarnegieMellon University. Recent versions were presented in seminars