The Journal of Finance

Option Momentum

Published: 10/3/2023,  Volume: 78,  Issue: 6  |  DOI: 10.1111/jofi.13279  |  Cited by: 55

STEVEN L. HESTON, CHRISTOPHER S. JONES, MEHDI KHORRAM, SHUAIQI LI, HAITAO MO

This paper investigates the performance of option investments across different stocks by computing monthly returns on at‐the‐money straddles on individual equities. We find that options with high historical returns continue to significantly outperform options with low historical returns over horizons ranging from 6 to 36 months. This phenomenon is robust to including out‐of‐the‐money options or delta‐hedging the returns. Unlike stock momentum, option return continuation is not followed by long‐run reversal. Significant returns remain after factor risk adjustment and after controlling for implied volatility and other characteristics. Across stocks, trading costs are unrelated to the magnitude of momentum profits.

Survival Bias and the Equity Premium Puzzle

Published: 10/2002,  Volume: 57,  Issue: 5  |  DOI: 10.1111/0022-1082.00486  |  Cited by: 29

Haitao Li, Yuewu Xu

Previous authors have raised the concern that there could be serious survival bias in the observed U.S. equity premium. Contrary to conventional wisdom, we argue that the survival bias in the U.S. data is unlikely to be significant. To reach this conclusion, we introduce a general framework for modeling survival and derive a mathematical relationship between the ex ante survival probability and the average survival bias. This relationship reveals the fundamental difficulty facing the survival argument: High survival bias requires an ex ante probability of market failure, which seems unrealistically high given the history of world financial markets.

Unspanned Stochastic Volatility: Evidence from Hedging Interest Rate Derivatives

Published: 1/20/2006,  Volume: 61,  Issue: 1  |  DOI: 10.1111/j.1540-6261.2006.00838.x  |  Cited by: 133

HAITAO LI, FENG ZHAO

Most existing dynamic term structure models assume that interest rate derivatives are redundant securities and can be perfectly hedged using solely bonds. We find that the quadratic term structure models have serious difficulties in hedging caps and cap straddles, even though they capture bond yields well. Furthermore, at‐the‐money straddle hedging errors are highly correlated with cap‐implied volatilities and can explain a large fraction of hedging errors of all caps and straddles across moneyness and maturities. Our results strongly suggest the existence of systematic unspanned factors related to stochastic volatility in interest rate derivatives markets.

The Effect of Temporal Risk Aversion on Optimal Consumption, the Equity Premium, and the Equilibrium Interest Rate

Published: 12/1989,  Volume: 44,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1989.tb02662.x  |  Cited by: 11

CHANG MO AHN

This paper demonstrates that temporal risk aversion makes smoothing consumption over time less attractive, while the usual risk aversion makes it more attractive. As temporal risk aversion increases, the equilibrium interest rate decreases and the equity premium increases. This paper also shows a striking and novel result that an increase in time impatience can lead to either a decrease or an increase in the interest rate, depending on the nature of the nonseparability.

Interest Rate Caps “Smile” Too! But Can the LIBOR Market Models Capture the Smile?

Published: 1/11/2007,  Volume: 62,  Issue: 1  |  DOI: 10.1111/j.1540-6261.2007.01209.x  |  Cited by: 97

ROBERT JARROW, HAITAO LI, FENG ZHAO

Using 3 years of interest rate caps price data, we provide a comprehensive documentation of volatility smiles in the caps market. To capture the volatility smiles, we develop a multifactor term structure model with stochastic volatility and jumps that yields a closed‐form formula for cap prices. We show that although a three‐factor stochastic volatility model can price at‐the‐money caps well, significant negative jumps in interest rates are needed to capture the smile. The volatility smile contains information that is not available using only at‐the‐money caps, and this information is important for understanding term structure models.

Are Liquidity and Information Risks Priced in the Treasury Bond Market?

Published: 1/23/2009,  Volume: 64,  Issue: 1  |  DOI: 10.1111/j.1540-6261.2008.01439.x  |  Cited by: 94

HAITAO LI, JUNBO WANG, CHUNCHI WU, YAN HE

We provide a comprehensive empirical analysis of the effects of liquidity and information risks on expected returns of Treasury bonds. We focus on the systematic liquidity risk of Pastor and Stambaugh as opposed to the traditional microstructure‐based measures of liquidity. Information risk is measured by the probability of information‐based trading (PIN). We document a strong positive relation between expected Treasury returns and liquidity and information risks, controlling for the effects of other systematic risk factors and bond characteristics. This relation is robust to many empirical specifications and a wide variety of traditional liquidity and informed trading proxies.

Jump‐Diffusion Processes and the Term Structure of Interest Rates

Published: 3/1988,  Volume: 43,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1988.tb02595.x  |  Cited by: 107

CHANG MO AHN, HOWARD E. THOMPSON

The authors investigate the term structure of interest rates when the underlying state variables and production technologies follow the jump‐diffusion processes. Even in some cases where the traditional expectations theory about the term structure is consistent with general equilibrium under diffusion processes, the traditional theory is not consistent under jump‐diffusion processes. It is shown that bond prices are strictly higher under jump risks than otherwise and that consumers with logarithmic utility functions will develop hedge portfolios in the presence of jump diffusion.

Corporate M&As and Labor Market Concentration: Efficiency Gains or Power Grabs?

Published: 4/1/2026,  Volume: 81,  Issue: 3  |  DOI: 10.1111/jofi.70035  |  Cited by: 1

DAVID CICERO, MO SHEN, JAIDEEP SHENOY

Mergers of firms that share labor markets increase labor market concentration which can lead to labor efficiency gains and/or create labor market power for the merged firms. Using a novel measure based on establishment‐level employment data, we find that merger‐induced increases in labor market concentration explain value creation in a sample of completed U.S. public firm mergers from 1991 to 2016. Analysis of the stock market reactions of rival, supplier, and customer firms, as well as firm‐ and establishment‐level real effects in the merging firms, supports a labor efficiency explanation of these merger gains.

The Geography of Block Acquisitions

Published: 11/11/2008,  Volume: 63,  Issue: 6  |  DOI: 10.1111/j.1540-6261.2008.01414.x  |  Cited by: 346

JUN‐KOO KANG, JIN‐MO KIM

Using a large sample of partial block acquisitions, we examine the importance of geographic proximity in corporate governance and target returns. We find that block acquirers have a strong preference for geographically proximate targets and acquirers that purchase shares in such targets are more likely to engage in post‐acquisition target governance activities than are remote block acquirers. Moreover, the targets of these acquirers realize higher announcement returns and better post‐acquisition operating performance than do targets of other types of acquirers, particularly when they face greater information asymmetries.

Regulation Fair Disclosure and Earnings Information: Market, Analyst, and Corporate Responses

Published: 11/7/2003,  Volume: 58,  Issue: 6  |  DOI: 10.1046/j.1540-6261.2003.00613.x  |  Cited by: 391

Warren Bailey, Haitao Li, Connie X. Mao, Rui Zhong

Abstract With the adoption of Regulation Fair Disclosure (Reg FD), market behavior around earnings releases displays no significant change in return volatility (after controlling for decimalization of stock trading) but significant increases in trading volume due to difference in opinion. Analyst forecast dispersion increases, and increases in other measures of disagreement and difference of opinion suggest greater difficulty in forming forecasts beyond the current quarter. Corporations increase the quantity of voluntary disclosures, but only for current quarter earnings. Thus, Reg FD seems to increase the quantity of information available to the public while imposing greater demands on investment professionals.

Tunneling or Value Added? Evidence from Mergers by Korean Business Groups

Published: 12/2002,  Volume: 57,  Issue: 6  |  DOI: 10.1111/1540-6261.00510  |  Cited by: 939

Kee‐Hong Bae, Jun‐Koo Kang, Jin‐Mo Kim

We examine whether firms belonging to Korean business groups (chaebols) benefit from acquisitions they make or whether such acquisitions provide a way for controlling shareholders to increase their wealth by increasing the value of other group firms (tunneling). We find that when a chaebol‐affiliated firm makes an acquisition, its stock price on average falls. While minority shareholders of a chaebol‐affiliated firm making an acquisition lose, the controlling shareholder of that firm on average benefits because the acquisition enhances the value of other firms in the group. This evidence is consistent with the tunneling hypothesis.