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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DISCUSSION
Published: 05/01/1980 | DOI: 10.1111/j.1540-6261.1980.tb02171.x
STEPHEN M. SCHAEFER
Time‐Dependent Variance and the Pricing of Bond Options
Published: 12/01/1987 | DOI: 10.1111/j.1540-6261.1987.tb04356.x
STEPHEN M. SCHAEFER, EDUARDO S. SCHWARTZ
In this paper, we develop a model for valuing debt options that takes into account the changing characteristics of the underlying bond by assuming that the standard deviation of return is proportional to the bond's duration. The resulting model uses the bond price as the single state variable and thus preserves much of the simplicity and robustness of the Black‐Scholes approach. The paper provides comparisons between option prices computed using this model and those using the Black‐Scholes and Brennan and Schwartz models.