The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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A Note on the Pricing of Commodity‐Linked Bonds
Published: 09/01/1987 | DOI: 10.1111/j.1540-6261.1987.tb03928.x
PETER CARR
The Valuation of Sequential Exchange Opportunities
Published: 12/01/1988 | DOI: 10.1111/j.1540-6261.1988.tb03967.x
PETER CARR
Sequential exchange opportunities are valued using the techniques of modern option‐pricing theory. The vehicle for analysis is the concept of a compound exchange option. This security is shown to exist implicitly in several contractual settings. A valuation formula for this option is derived. The formula is shown to generalize much previous work in option pricing. Several applications of the formula are presented.
The Finite Moment Log Stable Process and Option Pricing
Published: 03/21/2003 | DOI: 10.1111/1540-6261.00544
Peter Carr, Liuren Wu
We document a surprising pattern in S&P 500 option prices. When implied volatilities are graphed against a standard measure of moneyness, the implied volatility smirk does not flatten out as maturity increases up to the observable horizon of two years. This behavior contrasts sharply with the implications of many pricing models and with the asymptotic behavior implied by the central limit theorem (CLT). We develop a parsimonious model which deliberately violates the CLT assumptions and thus captures the observed behavior of the volatility smirk over the maturity horizon. Calibration exercises demonstrate its superior performance against several widely used alternatives.
Option Profit and Loss Attribution and Pricing: A New Framework
Published: 02/19/2020 | DOI: 10.1111/jofi.12894
PETER CARR, LIUREN WU
This paper develops a new top‐down valuation framework that links the pricing of an option investment to its daily profit and loss attribution. The framework uses the Black‐Merton‐Scholes option pricing formula to attribute the short‐term option investment risk to variation in the underlying security price and the option's implied volatility. Taking risk‐neutral expectation and demanding no dynamic arbitrage result in a pricing relation that links an option's fair implied volatility level to the underlying volatility level with corrections for the implied volatility's own expected direction of movement, its variance, and its covariance with the underlying security return.
What Type of Process Underlies Options? A Simple Robust Test
Published: 11/07/2003 | DOI: 10.1046/j.1540-6261.2003.00616.x
Peter Carr, Liuren Wu
We develop a simple robust method to distinguish the presence of continuous and discontinuous components in the price of an asset underlying options. Our method examines the prices of at‐the‐money and out‐of‐the‐money options as the option's time‐to‐maturity approaches zero. We show that these prices converge to zero at speeds that depend upon whether the underlying asset price process is purely continuous, purely discontinuous, or a combination of both. We apply the method to S&P 500 index options and find the existence of both a continuous component and a jump component in the index.
Static Hedging of Exotic Options
Published: 12/17/2002 | DOI: 10.1111/0022-1082.00048
Peter Carr, Katrina Ellis, Vishal Gupta
This paper develops static hedges for several exotic options using standard options. The method relies on a relationship between European puts and calls with different strike prices. The analysis allows for constant volatility or for volatility smiles or frowns.