The following paper presents a general derivation of the jump process option pricing formula. In particular, a general jump process formula is derived via an analysis of the limiting behavior of the binomial option pricing formula. In deriving the formula, a very simple central limit theorem known as Poisson's Limit Theorem is applied. The simplicity of the analysis allows the establishment of precisely the connections between the specification of the underlying binomial stock return process and the specific form of the corresponding continuous-time jump process formula. Several examples are provided to illustrate these connections.

This article explores the price behavior of a sample of corporate securities in which trading was temporarily suspended by the SEC. Suspensions are found to coincide with substantial devaluations of the suspended securities. Further, significant and prolonged negative abnormal returns are observed in the postsuspension period, an apparent violation of semistrong form market efficiency.

We show that the U.S. agricultural price support system, and certain other government insurance programs, can be interpreted as the provision of a random number of put options to program beneficiaries. Because the number of puts being supplied is random, the value of the guarantees is no longer given by the standard Black-Scholes put option formula. This paper uses the contingent-claims methodology of modern finance theory to derive an appropriate valuation formula for such programs. We estimate the value to farmers of agricultural price supports for several commodities covered by the U.S. agricultural price support system. Our results indicate that the current system raises the ex ante value of some crops by as much as 9 percent. The method of valuation is applicable to other forms of government guarantees, as well, such as exchange rate insurance and export subsidy guarantees.

To date, a number of studies involving the use of bond prices and/or returns have utilized the published prices of trades on the New York and other exchanges. These exchange quotes reflect the odd-lot activities of individual investors and account for only a negligible portion of the trading in listed issues. In contrast, the vast majority of listed corporate trading occurs over-the-counter and involves round-lot trades between institutions. Given differences in market characteristics, odd-lot exchange prices may differ substantially from those in the round-lot institutional market. This study compares exchange quotations from Moody's Bond Record with prices assigned by Merrill Lynch's institutional pricing service and uses each set of prices to calculate return and risk measures. Institutional (Merrill Lynch) bond prices are shown to be systematically greater than exchange (Moody's) prices. In addition, bond returns based on Merrill Lynch prices are shown to yield significantly higher beta and R2 estimates, as well as significantly lower standard deviation and residual risk estimates.

Recent empirical studies have found ex post common stock returns to be consistently positively skewed. The frequency of positive skewness in this study is found to be relatively stable over varying time periods from 1961 to 1980. However, the skewness of individual stocks and portfolios of stocks does not persist across different time periods. Positively-skewed equity portfolios in one period are not likely to be positively skewed in the next time period. Past positively-skewed returns do not predict future positively-skewed returns.

Portfolios of stocks issued by small firms are well known to earn rates of return in excess of those commensurate with their market sensitivities. One common explanation for this phenomenon is that small firm stocks are riskier than large firm stocks because less information is available about the former than about the latter. A necessary condition for such an explanation to be valid is that the information effect not be eliminated by combining the individual stocks into portfolios. This paper uses jump-diffusion return models to gauge the impact of information by firm size. The results show that portfolios of small firm stocks are no more prone to information surprises than are portfolios of large firm stocks. However, portfolios of small firm stocks are found to react more severely than portfolios of large firm stocks when surprises do occur.

This paper reexamines the issue of common stock market risk stationarity by applying a newly available exact test for random-walk regression coefficients. For each eight-year subperiod tested in the 1951–1974 interval, betas for individual New York Stock Exchange-listed stocks appeared to be nonstationary. The statistical powers of the exact test and of locally most powerful tests are compared to the power of the test employed previously by Sunder. These power considerations are cited to explain the differences between test results obtained here and those reported by Sunder.

This article examines the interest rate risk characteristics of a general class of floating rate securities, which includes Chance's securities as a special case. The calculation of duration for Chance's securities is zero, as it should be. Securities in the broader class can have durations that are negative or longer than the period of time that must elapse before the payments can reflect changes in market interest rates. The effect on duration of changes in the parameters of the function relating interest rate shocks to the payments and changes in the slope of the term structure are examined.

This paper demonstrates that refunding discounted debt represents a form of tax arbitrage that is profitable to taxpaying corporations when the present value of the additional tax shields, created through the refunding, exceeds the sum of the present value of the overall increase in pre-tax debt service requirements, after-tax transaction costs, and any tax incurred on the gain. The paper contrasts the factors that give rise to profitable opportunities to refund high-coupon debt and discounted debt. It also shows that, of the analytical approaches previously suggested for calculating the net advantage of refunding discounted debt, discounting the change in after-tax debt service payments at the after-tax cost of money for the refunding issue is the only one consistent with preserving debt service parity.

Numerous studies have analyzed the stock market reaction to information released in proxy statements. Two possible biases in proxy statement research are suggested frequently: misspecification of the return benchmark and a sample selection bias from analyzing only “clean” events. This paper presents evidence that most of the conclusions of existing studies are not affected by these potential biases. A significantly positive abnormal return was found around a random sample of shareholder meeting dates. The result indicates that interpreting event study results for announcements occurring around annual shareholder meetings must be conducted carefully. The results are consistent with the findings of Kalay and Loewenstein [14], who argue that risk and expected return can increase around predictable, information-producing events. Alternatively, the study can be viewed as being consistent with several recent studies that find anomalous results, using daily return data and large samples.

A fundamental statistical test of serial independence is developed and applied to daily stock returns. Let xt be the deviation of the daily return on a stock from its sample mean after any autocorrelation present has been removed. If xt is serially independent, then the cumulative sum of xt over time is the position of a one-dimensional random walk on a line. The empirical distribution of step lengths over a large sample allows the distribution of the largest absolute excursion in a T-step walk to be calculated by repeated simulation. The observed maximal excursions are found to be significantly smaller than one would expect, based on serial independence and the observed distribution of step lengths. It is concluded that these daily stock returns are not serially independent and that the market value of the corporations studied has a tendency to return to an interval around the trend value.

The word revolution is entirely appropriate for describing the changes in financial institutions and instruments that have occurred in the past twenty years. The major impulses to successful financial innovations have come from regulations and taxes. The outlook for the future is for a slowing down of the rate of financial innovation, but much growth and improvement are still in prospect.

In a recent paper, Johnson [7] has given an analytic approximation to the American put price that delivers values that are very close to numerical solutions. The limitation to the Johnson approximation is that it is only applicable to put options on stocks without cash dividends. This study modifies the Johnson approximation to value options on stocks that have one exdividend date prior to the option expiration date, and these approximation values are compared to the analytic solutions provided by the Geske and Johnson [6] American put option pricing model. The approximation values are generally very close to the analytic solutions.

It is shown that the existing tax law with its incomplete tax-loss offset will often lead to leasing contracts being advantageous to firms. This result obtains even if firms are in the same tax bracket and have the same probability of having positive taxable income.

While the value of listing equity securities has been researched extensively, no studies have examined the market reaction to the decision to list corporate debt. Since the listing of corporate bonds on the major exchanges is a significant corporate activity, this study examines the impact of bond listing on shareholder wealth. Using a variety of possible announcement dates as well as cumulative abnormal returns between dates, no detectable market reaction to debt listing is found. Therefore, the listing of corporate bonds does not appear to be valued by the common shareholders of those same firms.

This note shows that, appearances to the contrary, the lower bounds on the price of a call option obtained by Levy and by Ritchken are identical, and that this common bound is never inferior to the lower bound obtained by Perrakis and Ryan.