This paper derives a simple square root option pricing model (SSROPM) using a general equilibrium approach in an economy where the representative agent has a generalized logarithmic utility function. Our option pricing formulae, like the Black-Scholes model, do not depend on the preference...

This paper generalizes the seminal Cox-Ross-Rubinstein (1979) binomial option pricing model to all members of the class of transformed-binomial pricing processes. Our investigation addresses issues related with asset pricing modeling, hedging strategies, and option pricing. We derive explicit...

This article illustrates the impact of both spot and option liquidity levels on option prices. Using implied volatility to measure the option price structure, our empirical results reveal that even after controlling for the systematic risk of Duan and Wei (2009), a clear link remains between...

We model deposit insurance as a European put option on the value of the bank in which bank assets follow a displaced lognormal diffusion process. We derive closed-form solutions for the value of the bank for bank equity holders, depositors, and the deposit insurer under three deposit insurance...

This article presents a pure exchange economy that extends Rubinstein (1976) to show how the jump-diffusion option pricing model of Merton (1976) is altered when jumps are correlated with diffusive risks. All correlations are statistically different from zero. In equilibrium, the equity risk...

Ferguson and Shockley (2003) demonstrate that by utilizing an equity-only proxy for the market index, an empirical single factor capital asset pricing model can lead to anomalies. As most extant studies, they show that information from firms' liabilities-equity structures, per se, leverage and...

This paper investigates how violations of the assumption that jumps are identically and independently distributed (IID) affect option prices. We characterize several types of IID jumps violations including jumps with time-varying means, time-varying variances, and time-varying autocorrelations....

This paper derives preference-free pricing formulae for foreign exchange options which are consistent with a general equilibrium representative agent economy. These risk neutral valuation relationships (RNVR's) are obtained for the Su jump-diffusion family. Call and put options are particular...

This article presents a modification of Merton's (1976) ruin option pricing model to estimate the implied probability of default from stock and option market prices. To test the model, we analyze all global financial firms with traded options in the U.S. over the period December 1996 through...

There is empirical evidence and supporting theory showing performance-based compensation can motivate accounting based earnings management. Less well studied is the link between such compensation and direct forms of earnings management. In this paper we provide a model demonstrating that...