We investigate the preference and distribution restrictions that underlie explicit risk-neutral option valuation equations. We establish new sufficient conditions in terms of utility functions and joint distributions of assets' payoffs and state variables for these models to hold in equilibrium...

This paper extends the jump-diffusion option pricing model of Merton (1976) and the displaced diffusion option pricing model of Rubinstein (1983) to price options on stock indices. First, we provide a theory showing that the stock index value has a positive threshold or positive lower bound if...

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...