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: 07/01/1986 | DOI: 10.1111/j.1540-6261.1986.tb04515.x
EHUD I. RONN
A Characterization of the Daily and Intraday Behavior of Returns on Options
Published: 06/01/1994 | DOI: 10.1111/j.1540-6261.1994.tb05152.x
AAMIR M. SHEIKH, EHUD I. RONN
The daily and intraday behavior of returns on Chicago Board Options Exchange options is examined. Option returns contain systematic patterns even after adjusting for patterns in the means and variances of the underlying assets. This is consistent with the hypothesis that informed trading in options can make the order flow in the options market informative about the value of the underlying asset, making options nonredundant. The intraday patterns in adjusted option return variances are further consistent with a model of strategic trading by informed and discretionary liquidity traders.
A Utility‐Based Model of Common Stock Price Movements
Published: 03/01/1986 | DOI: 10.1111/j.1540-6261.1986.tb04492.x
ROBERT H. LITZENBERGER, EHUD I. RONN
This paper develops and tests a nonlinear utility‐based econometric model of the temporal behavior of aggregate stock price movements based on a constant relative risk aversion utility function and an observable information set consisting of aggregate consumption, aggregate dividends, and past stock prices. The stochastic process derived from time‐series analyses of consumption and dividends measured over annual intervals is used to derive and empirically test a closed‐form solution for stock‐price movements. The endogenization of discount rate changes in the utility‐based model is shown to be more consistent with aggregate stock price movements over a twenty‐year holdout period than constant discount rate models. The model is also used to estimate the representative investor's relative risk aversion. The estimate of 4.22 is consistent with that used by Grossman and Shiller in their perfect foresight model and is significantly higher than the relative risk aversion of 1.0 implied by logarithmic utility.
Pricing Risk‐Adjusted Deposit Insurance: An Option‐Based Model
Published: 09/01/1986 | DOI: 10.1111/j.1540-6261.1986.tb04554.x
EHUD I. RONN, AVINASH K. VERMA
This paper presents a methodology for arriving at empirical estimates of deposit insurance premiums from market data by using isomorphic relationships between equity and a call option, and insurance and a put option. The data utilizes the market value of equity to solve for the asset value and its volatility. Market perceptions of FDIC bailout policies are explicitly modeled so as to eliminate the bias in inverted values of assets and their volatility. Sensitivity analyses are performed to show that rank orderings based on premiums are robust to changes in specification, thus facilitating allocation of aggregate premium across banks.
Arbitrage‐Based Estimation of Nonstationary Shifts in the Term Structure of Interest Rates
Published: 07/01/1989 | DOI: 10.1111/j.1540-6261.1989.tb04380.x
ROBERT R. BLISS, EHUD I. RONN
The purpose of this paper is to provide a test of a state‐dependent multinomial model of intertemporal changes in the term structure of interest rates. The theoretical background for the model comes from Ho and Lee (1986). The current paper extends their model in several significant ways. First, we perform diagnostic tests on the data to demonstrate that the empirical results reject a binomial model in favor of a trinomial one. After theoretically deriving the appropriate trinomial model, the current paper extends their model to allow for state‐dependent shifts which are determined by the set of ex ante observable state variables. The methodology for the study utilizes OLS regressions to identify the exogenous explanatory variables which drive the hypothesized trinomial process of term structure evolution. The empirical tests indicate that the set of state variables explains a significant portion of the variability in the shifts of the term structure over time. The model also identifies and quantifies a set of variables which impact on changes in the term structure of interest rates.