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789
Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure
, 1976
"... This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the ‘separation and control’ issue, investigate the nature of ..."
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Cited by 898 (5 self)
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This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the ‘separation and control’ issue, investigate the nature of the agency costs generated by the existence of debt and outside equity, demonstrate who bears costs and why, and investigate the Pareto optimality of their existence. We also provide a new definition of the firm, and show how our analysis of the factors influencing the creation and issuance of debt and equity claims is a special case of the supply side of the completeness of markets problem.
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
Option Pricing: A Simplified Approach
 Journal of Financial Economics
, 1979
"... This paper presents a simple discretetime model for valumg optlons. The fundamental econonuc principles of option pricing by arbitrage methods are particularly clear In this setting. Its development requires only elementary mathematics, yet it contains as a special limiting case the celebrated Blac ..."
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Cited by 563 (8 self)
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This paper presents a simple discretetime model for valumg optlons. The fundamental econonuc principles of option pricing by arbitrage methods are particularly clear In this setting. Its development requires only elementary mathematics, yet it contains as a special limiting case the celebrated Black&holes model, which has previously been derived only by much more difficult methods. The basic model readily lends itself to generalization in many ways. Moreover, by its very constructlon, it gives rise to a simple and efficient numerical procedure for valumg optlons for which premature exercise may be optimal. 1.
Coherent Measures of Risk
, 1998
"... In this paper we study both market risks and nonmarket risks, without complete markets assumption, and discuss methods of measurement of these risks. We present and justify a set of four desirable properties for measures of risk, and call the measures satisfying these properties "coherent". We exam ..."
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Cited by 433 (2 self)
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In this paper we study both market risks and nonmarket risks, without complete markets assumption, and discuss methods of measurement of these risks. We present and justify a set of four desirable properties for measures of risk, and call the measures satisfying these properties "coherent". We examine the measures of risk provided and the related actions required by SPAN, by the SEC/NASD rules and by quantile based methods. We demonstrate the universality of scenariobased methods for providing coherent measures. We offer suggestions concerning the SEC method. We also suggest a method to repair the failure of subadditivity of quantilebased methods.
Pricing with a Smile
 Risk Magazine
, 1994
"... prices as a function of volatility. If an option price is given by the market we can invert this relationship to get the implied volatility. If the model were perfect, this implied value would be the same for all option market prices, but reality shows this is not the case. Implied Black–Scholes vol ..."
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Cited by 251 (0 self)
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prices as a function of volatility. If an option price is given by the market we can invert this relationship to get the implied volatility. If the model were perfect, this implied value would be the same for all option market prices, but reality shows this is not the case. Implied Black–Scholes volatilities strongly depend on the maturity and the strike of the European option under scrutiny. If the implied volatilities of atthemoney (ATM) options on the Nikkei 225 index are 20 % for a maturity of six months and 18 % for a maturity of one year, we are in the uncomfortable position of assuming that the Nikkei oscillates with a constant volatility of 20 % for six months but also oscillates with a constant volatility of 18 % for one year. It is easy to solve this paradox by allowing volatility to be timedependent, as Merton did (see Merton, 1973). The Nikkei would first exhibit an instantaneous volatility of 20 % and subsequently a lower one, computed by a forward relationship to accommodate the oneyear volatility. We now have a single process, compatible with the two option prices. From the term structure of implied volatilities we can infer a timedependent instantaneous volatility, because the former is the quadratic mean of the latter. The spot process S is then governed by the following stochastic differential equation: dS �rt () dt��() t dW
An Analytic Derivation of the Cost of Deposit Insurance and Loan Guarantees: An Application of Modern Option Pricing Theory
 Journal of Banking and Finance
, 1977
"... It is not uncommon in the arrangement of a loan to include as part of the financial package a guarantee of the loan by a third party. Examples are guarantees by a parent company of loans made to its subsidiaries or government guarantees of loans made to private corporations. Also included would be g ..."
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Cited by 217 (2 self)
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It is not uncommon in the arrangement of a loan to include as part of the financial package a guarantee of the loan by a third party. Examples are guarantees by a parent company of loans made to its subsidiaries or government guarantees of loans made to private corporations. Also included would be guarantees of bank deposits by the Federal Deposit Insurance Corporation. As with other forms of insurance, the issuing of a guarantee imposes a liability or cost on the guarantor. In this paper, a formula is derived to evaluate this cost. The method used is to demonstrate an isomorphic correspondence between loan guarantees and common stock put options, and then to use the well developed theory of option pricing to derive the formula. 1.
Efficient Analytic Approximation of American Option Values
 Journal of Finance
, 1987
"... This paper provides simple, analytic approximations for pricing exchangetraded American call and put options written on commodities and commodity futures contracts. ..."
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Cited by 159 (1 self)
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This paper provides simple, analytic approximations for pricing exchangetraded American call and put options written on commodities and commodity futures contracts.
Stochastic Volatility for Lévy Processes
, 2001
"... Three processes re°ecting persistence of volatility are initially formulated by evaluating three L¶evy processes at a time change given by the integral of a mean reverting square root process. The model for the mean reverting time change is then generalized to include NonGaussian models that are so ..."
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Cited by 100 (8 self)
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Three processes re°ecting persistence of volatility are initially formulated by evaluating three L¶evy processes at a time change given by the integral of a mean reverting square root process. The model for the mean reverting time change is then generalized to include NonGaussian models that are solutions to OU (OrnsteinUhlenbeck) equations driven by one sided discontinuous L¶evy processes permitting correlation with the stock. Positive stock price processes are obtained by exponentiating and mean correcting these processes, or alternatively by stochastically exponentiating these processes. The characteristic functions for the log price can be used to yield option prices via the fast Fourier transform. In general, mean corrected exponentiation performs better than employing the stochastic exponential. It is observed that the mean corrected exponential model is not a martingale in the ¯ltration in which it is originally de¯ned. This leads us to formulate and investigate the important property of martingale marginals where we seek martingales in altered ¯ltrations consistent with the one dimensional marginal distributions of the level of the process at each future date. 1
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