Many common types of financial contracts incorporates options with extendible maturities. This paper derives closed-form expressions for options that can be extended by the optionholder and presents a number of applications including the valuation of American options with stochastic dividends,...

The author examines how the empirical implications of the capital asset pricing model (CAPM) are affected by the length of the period over which returns are measured. He shows that the continuous-time CAPM becomes a multifactor model when the asset pricing relation is aggregated temporally. He...

We develop a simple approach to valuing risky corporate debt that incorporates both default and interest rate risk. We use this approach to derive simple closed-form valuation expressions for fixed and floating rate debt. The model provides a number of interesting new insights about pricing and...

Market prices for callable Treasury bonds often imply negative values for the implicit call option. The author considers a variety of possible explanations for these negative values including the Treasury's track record in calling bonds optimally, tax-related effects, tax-timing options, and...

The authors develop a two-factor general equilibrium model of the term structure. The factors are the short-term interest rate and the volatility of the short-term interest rate. The authors derive closed-form expressions for discount bonds and study the properties of the term structure implied...

With dual trading, brokers trade both for their customers and for their own account. The authors study dual trading and find that customers who are less likely to be informed have higher expected profits with dual trading while customers who are more likely to be informed have higher expected...

In the absence of frictions, the value of the underlying asset implied by option prices must equal its actual market value. With frictions, however, this requirement need not hold. Using S&P 100 index options data, I find that the implied cost of the index is significantly higher in the options...

Empirical evidence of time varying term premia in bond returns is frequently interpreted as evidence against the expectations hypothesis. This paper shows that the expectations hypothesis can actually imply time varying term premia if the time frame for which the expectations hypothesis holds...

How marketability affects security prices is one of the most important issues in finance. The authors derive a simple analytical upper bound on the value of marketability using option-pricing theory. They show that discounts for lack of marketability can potentially be large even when the...