The Journal of Finance

On Equilibrium When Contingent Capital Has a Market Trigger: A Correction to Sundaresan and Wang Journal of Finance (2015)

Published: 3/8/2019,  Volume: 74,  Issue: 3  |  DOI: 10.1111/jofi.12762  |  Cited by: 25

GEORGE PENNACCHI, ALEXEI TCHISTYI

This paper identifies an error in Sundaresan and Wang (2015, hereafter SW) that invalidates its Theorem 1. The paper develops a model of contingent capital (CC) with a stock price trigger that is consistent with SW's framework and yields closed‐form solutions for stock and CC prices. Yet, the model shows that unique stock price equilibria exist for a broader range of CC contractual terms than those required by SW. Specifically, when conversion terms benefit CC investors and penalize shareholders, a unique equilibrium can exist rather than the multiple equilibria stated in SW.

Habit Formation and Macroeconomic Models of the Term Structure of Interest Rates

Published: 11/28/2007,  Volume: 62,  Issue: 6  |  DOI: 10.1111/j.1540-6261.2007.01299.x  |  Cited by: 122

ANDREA BURASCHI, ALEXEI JILTSOV

This paper introduces a new class of nonaffine models of the term structure of interest rates that is supported by an economy with habit formation. Distinguishing features of the model are that the interest rate dynamics are nonlinear, interest rates depend on lagged monetary and consumption shocks, and the price of risk is not a constant multiple of interest rate volatility. We find that habit persistence can help reproduce the nonlinearity of the spot rate process, the documented deviations from the expectations hypothesis, the persistence of the conditional volatility of interest rates, and the lead‐lag relationship between interest rates and monetary aggregates.

Model Uncertainty and Option Markets with Heterogeneous Beliefs

Published: 12/2006,  Volume: 61,  Issue: 6  |  DOI: 10.1111/j.1540-6261.2006.01006.x  |  Cited by: 278

ANDREA BURASCHI, ALEXEI JILTSOV

This paper provides option pricing and volume implications for an economy with heterogeneous agents who face model uncertainty and have different beliefs on expected returns. Market incompleteness makes options nonredundant, while heterogeneity creates a link between differences in beliefs and option volumes. We solve for both option prices and volumes and test the joint empirical implications using S&P500 index option data. Specifically, we use survey data to build an Index of Dispersion in Beliefs and find that a model that takes information heterogeneity into account can explain the dynamics of option volume and the smile better than can reduced‐form models with stochastic volatility.

Real Options, Volatility, and Stock Returns

Published: 7/19/2012,  Volume: 67,  Issue: 4  |  DOI: 10.1111/j.1540-6261.2012.01754.x  |  Cited by: 204

GUSTAVO GRULLON, EVGENY LYANDRES, ALEXEI ZHDANOV

We provide evidence that the positive relation between firm‐level stock returns and firm‐level return volatility is due to firms’ real options. Consistent with real option theory, we find that the positive volatility‐return relation is much stronger for firms with more real options and that the sensitivity of firm value to changes in volatility declines significantly after firms exercise their real options. We reconcile the evidence at the aggregate and firm levels by showing that the negative relation at the aggregate level may be due to aggregate market conditions that simultaneously affect both market returns and return volatility.

Equity Misvaluation and Default Options

Published: 1/20/2019,  Volume: 74,  Issue: 2  |  DOI: 10.1111/jofi.12748  |  Cited by: 28

ASSAF EISDORFER, AMIT GOYAL, ALEXEI ZHDANOV

We study whether default options are mispriced in equity values by employing a structural equity valuation model that explicitly takes into account the value of the option to default (or abandon the firm) and uses firm‐specific inputs. We implement our model on the entire cross section of stocks and identify both over‐ and underpriced equities. An investment strategy that buys undervalued stocks and shorts overvalued stocks generates an annual four‐factor alpha of about 11% for U.S. stocks. The model's performance is stronger for stocks with a higher value of the default option, such as distressed or highly volatile stocks.

Corporate Political Contributions and Stock Returns

Published: 3/19/2010,  Volume: 65,  Issue: 2  |  DOI: 10.1111/j.1540-6261.2009.01548.x  |  Cited by: 799

MICHAEL J. COOPER, HUSEYIN GULEN, ALEXEI V. OVTCHINNIKOV

We develop a new and comprehensive database of firm‐level contributions to U.S. political campaigns from 1979 to 2004. We construct variables that measure the extent of firm support for candidates. We find that these measures are positively and significantly correlated with the cross‐section of future returns. The effect is strongest for firms that support a greater number of candidates that hold office in the same state that the firm is based. In addition, there are stronger effects for firms whose contributions are slanted toward House candidates and Democrats.

S&P 500 Index Additions and Earnings Expectations

Published: 9/11/2003,  Volume: 58,  Issue: 5  |  DOI: 10.1111/1540-6261.00589  |  Cited by: 287

Diane K. Denis, John J. McConnell, Alexei V. Ovtchinnikov, Yun Yu

AbstractStock price increases associated with addition to the S&P 500 Index have been interpreted as evidence that demand curves for stocks slope downward. A key premise underlying this interpretation is that Index inclusion provides no new information about companies' future prospects. We examine this premise by analyzing analysts' earnings per share (eps) forecasts around Index inclusion and by comparing postinclusion realized earnings to preinclusion forecasts. Relative to benchmark companies, companies newly added to the Index experience significant increases in eps forecasts and significant improvements in realized earnings. These results indicate that S&P Index inclusion is not an information‐free event.