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Article: An alternative valuation model for contingent claims

TitleAn alternative valuation model for contingent claims
Authors
KeywordsStocks
Bonds
Fundamental valuation equation
Interest rate derivatives
Stock options
Issue Date1997
Citation
Journal of Financial Economics, 1997, v. 44, n. 1, p. 123-165 How to Cite?
AbstractThis paper studies contingent claim valuation in a Lucas-type exchange economy. The derived fundamental valuation equation differs from its Cox-Ingersoll-Ross production-economy counterpart in that it is expressed in terms of the direct utility function and an exogenous output process, thus offering superior tractability. We apply our approach to derive closed-form solutions for bond, bond option, individual stock, and stock option prices, under a more general setting than allowable in the Cox Ingersoll-Ross framework. The resulting interest rate and stock price dynamics are empirically plausible. Moreover, our stock option pricing formula with stochastic volatility and interest rates can reconcile certain puzzling empirical regularities, including the volatility smile.
Persistent Identifierhttp://hdl.handle.net/10722/212682
ISSN
2015 Impact Factor: 3.541
2015 SCImago Journal Rankings: 9.920

 

DC FieldValueLanguage
dc.contributor.authorBakshi, Gurdip S.-
dc.contributor.authorChen, Zhiwu-
dc.date.accessioned2015-07-28T04:04:41Z-
dc.date.available2015-07-28T04:04:41Z-
dc.date.issued1997-
dc.identifier.citationJournal of Financial Economics, 1997, v. 44, n. 1, p. 123-165-
dc.identifier.issn0304-405X-
dc.identifier.urihttp://hdl.handle.net/10722/212682-
dc.description.abstractThis paper studies contingent claim valuation in a Lucas-type exchange economy. The derived fundamental valuation equation differs from its Cox-Ingersoll-Ross production-economy counterpart in that it is expressed in terms of the direct utility function and an exogenous output process, thus offering superior tractability. We apply our approach to derive closed-form solutions for bond, bond option, individual stock, and stock option prices, under a more general setting than allowable in the Cox Ingersoll-Ross framework. The resulting interest rate and stock price dynamics are empirically plausible. Moreover, our stock option pricing formula with stochastic volatility and interest rates can reconcile certain puzzling empirical regularities, including the volatility smile.-
dc.languageeng-
dc.relation.ispartofJournal of Financial Economics-
dc.subjectStocks-
dc.subjectBonds-
dc.subjectFundamental valuation equation-
dc.subjectInterest rate derivatives-
dc.subjectStock options-
dc.titleAn alternative valuation model for contingent claims-
dc.typeArticle-
dc.description.natureLink_to_subscribed_fulltext-
dc.identifier.scopuseid_2-s2.0-0031115958-
dc.identifier.volume44-
dc.identifier.issue1-
dc.identifier.spage123-
dc.identifier.epage165-

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