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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The Valuation of Options When Asset Returns Are Generated by a Binomial Process
Published: 12/01/1984 | DOI: 10.1111/j.1540-6261.1984.tb04922.x
R. C. STAPLETON, M. G. SUBRAHMANYAM
This paper values options on assets whose returns, over a finite interval of time, are generated by a binomial process. It shows that a simple valuation relationship, between the option and the underlying stock, obtains if investors have preference functions that belong to a particular class, even if opportunities to hedge do not exist. One particular application of the theory is in the case where the stock price over a finite interval could increase by an amount, fall by the same amount, or stay at the same level. The results in this paper may be viewed as the foundation of the preference‐based approaches to obtaining a risk neutral valuation relationship.
The Valuation of Multivariate Contingent Claims in Discrete Time Models
Published: 03/01/1984 | DOI: 10.1111/j.1540-6261.1984.tb03869.x
R. C. STAPLETON, M. G. SUBRAHMANYAM
There are several examples in the literature of contingent claims whose payoffs depend on the outcomes of two or more stochastic variables. Familiar cases of such claims include options on a portfolio of options, options whose exercise price is stochastic, and options to exchange one asset for another. This paper derives risk neutral valuation relationships (RNVRs) in a discrete time setting that facilitate the pricing of such complex contingent claims in two specific cases: joint lognormally distributed underlying variables and constant proportional risk aversion on the part of investors, and joint normally distributed underlying variables and constant absolute risk aversion preferences, respectively. This methodology is then applied to the valuation of several interesting complex contingent claims such as multiperiod bonds, multicurrency option bonds, and investment options.
The Market Model and Capital Asset Pricing Theory: A Note
Published: 12/01/1983 | DOI: 10.1111/j.1540-6261.1983.tb03846.x
R. C. STAPLETON, M. G. SUBRAHMANYAM
This note shows that a linear market model is sufficient to derive a linear relationship between beta and expected return. Furthermore, the slope of the relationship will be identical with that of the Capital Asset Pricing Model if the return on the market portfolio is normally distributed. However, results from characterization theory suggest that the linear market model assumption is close to that of multivariate normality.
The Valuation of American Options with Stochastic Interest Rates: A Generalization of the Geske—Johnson Technique
Published: 04/18/2012 | DOI: 10.1111/j.1540-6261.1997.tb04823.x
T. S. HO, RICHARD C. STAPLETON, MARTI G. SUBRAHMANYAM
The Geske–Johnson approach provides an efficient and intuitively appealing technique for the valuation and hedging of American‐style contingent claims. Here, we generalize their approach to a stochastic interest rate economy. The method is implemented using options exercisable on one of a finite number of dates. We illustrate how the value of an American‐style option increases with interest rate volatility. The magnitude of this effect depends on the extent to which the option is in the money, the volatilities of the underlying asset and the interest rates, as well as the correlation between them.