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141
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 ..."
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Cited by 704 (4 self)
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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
Post'87 Crash Fears in the S&P 500 Futures Option Market
, 1998
"... Postcrash distributions inferred from S ..."
Numerical Valuation of High Dimensional Multivariate American Securities
, 1994
"... We consider the problem of pricing an American contingent claim whose payoff depends on several sources of uncertainty. Using classical assumptions from the Arbitrage Pricing Theory, the theoretical price can be computed as the maximum over all possible early exercise strategies of the discounted ..."
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Cited by 95 (0 self)
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We consider the problem of pricing an American contingent claim whose payoff depends on several sources of uncertainty. Using classical assumptions from the Arbitrage Pricing Theory, the theoretical price can be computed as the maximum over all possible early exercise strategies of the discounted expected cash flows under the modified riskneutral information process. Several efficient numerical techniques exist for pricing American securities depending on one or few (up to 3) risk sources. They are either latticebased techniques or finite difference approximations of the BlackScholes diffusion equation. However, these methods cannot be used for highdimensional problems, since their memory requirement is exponential in the
Psychological factors and stock option exercise
 Quarterly Journal of Economics
, 1999
"... We investigate stock option exercise decisions by over 50,000 employees at seven corporations. Controlling for economic factors, psychological factors in�uence exercise. Consistent with psychological models of beliefs, employees exercise in response to stock price trends—exercise is positively relat ..."
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Cited by 70 (3 self)
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We investigate stock option exercise decisions by over 50,000 employees at seven corporations. Controlling for economic factors, psychological factors in�uence exercise. Consistent with psychological models of beliefs, employees exercise in response to stock price trends—exercise is positively related to stock returns during the preceding month and negatively related to returns over longer horizons. Consistent with psychological models of values that include reference points, employee exercise activity roughly doubles when the stock price exceeds the maximum price attained during the previous year. I.
Randomization and the American Put
 The Review of Financial Studies
, 1998
"... Conference. In particular, I am grateful to an unknown RFS referee, Kerry Back, Michael Brennan, Darrell Du e, ..."
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Cited by 53 (1 self)
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Conference. In particular, I am grateful to an unknown RFS referee, Kerry Back, Michael Brennan, Darrell Du e,
Alternative characterizations of American put options
 Mathematical Finance
, 1992
"... Viswanathan, and the participants of workshops at Vanderbilt University and Cornell University. The first two authors are grateful for financial support from Banker’s Trust. We are particularly grateful to Henry McKean for many valuable discussions. Alternative Characterizations of American Put Opti ..."
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Cited by 46 (1 self)
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Viswanathan, and the participants of workshops at Vanderbilt University and Cornell University. The first two authors are grateful for financial support from Banker’s Trust. We are particularly grateful to Henry McKean for many valuable discussions. Alternative Characterizations of American Put Options We derive alternative representations of the McKean equation for the value of the American put option. Our main result decomposes the value of an American put option into the corresponding European put price and the early exercise premium. We then represent the European put price in a new manner. This representation allows us to alternatively decompose the price of an American put option into its intrinsic value and time value, and to demonstrate the equivalence of our results to the McKean equation. Alternative Characterizations of American Put Options The problem of valuing American options continues to intrigue finance theorists. For example, in
Robust Numerical Methods for Contingent Claims under Jump Diffusion Processes
 IMA Journal of Numerical Analysis
, 2003
"... An implicit method is developed for the numerical solution of option pricing models where it is assumed that the underlying process is a jump diffusion. This method can be applied to a variety of contingent claim valuations, including American options, various kinds of exotic options, and models wit ..."
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Cited by 32 (13 self)
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An implicit method is developed for the numerical solution of option pricing models where it is assumed that the underlying process is a jump diffusion. This method can be applied to a variety of contingent claim valuations, including American options, various kinds of exotic options, and models with uncertain volatility or transaction costs. Proofs of timestepping stability and convergence of a fixed point iteration scheme are presented. For typical model parameters, it is shown that the fixed point iteration reduces the error by two orders of magnitude at each iteration. The correlation integral is computed using a fast Fourier transform (FFT) method. Techniques are developed for avoiding wraparound effects. Numerical tests of convergence for a variety of options are presented.
Continuoustime methods in finance: A review and an assessment
 Journal of Finance
, 2000
"... I survey and assess the development of continuoustime methods in finance during the last 30 years. The subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing, term structure theory, asset pricing, and optimal consumption and portfolio choices. ..."
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Cited by 32 (0 self)
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I survey and assess the development of continuoustime methods in finance during the last 30 years. The subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing, term structure theory, asset pricing, and optimal consumption and portfolio choices. During the period 1981 to 1999 the theory has been extended and modified to better explain empirical regularities in various subfields of finance. This latter subperiod has seen significant progress in econometric theory, computational and estimation methods to test and implement continuoustime models. Capital market frictions and bargaining issues are being increasingly incorporated in continuoustime theory. THE ROOTS OF MODERN CONTINUOUSTIME METHODS in finance can be traced back to the seminal contributions of Merton ~1969, 1971, 1973b! in the late 1960s and early 1970s. Merton ~1969! pioneered the use of continuoustime modeling in financial economics by formulating the intertemporal consumption and portfolio choice problem of an investor in a stochastic dynamic programming setting.