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 American Put Option and Its Critical Stock Price
Published: 12/17/2002 | DOI: 10.1111/0022-1082.00289
David S. Bunch, Herb Johnson
We derive an expression for the critical stock price for the American put. We start by expressing the put price as an integral involving first‐passage probabilities. This approach yields intuition for Merton's result for the perpetual put. We then consider the finite‐lived case. Using (1) the fact that the put value ceases to depend on time when the critical stock price is reached and (2) the result that an American put equals a European put plus an early‐exercise premium, we derive the critical stock price. We approximate the critical‐stock‐price function to compute accurate put prices.
A Simple and Numerically Efficient Valuation Method for American Puts Using a Modified Geske‐Johnson Approach
Published: June 1992 | DOI: 10.1111/j.1540-6261.1992.tb04412.x
DAVID S. BUNCH, HERB JOHNSON
Geske and Johnson (1984) develop an equation for the American put price and obtain accurate prices using a method requiring quadrivariate normal integrals evaluated over an interval containing four equally spaced exercise points. We show that a modification of their method which uses optimal placement of exercise points yields in most cases accurate values using nothing more than bivariate normals. In the more difficult (deep‐in‐the‐money) cases, trivariate normals suffice.
The Pricing of Options with Default Risk
Published: June 1987 | DOI: 10.1111/j.1540-6261.1987.tb02567.x
HERB JOHNSON, RENÉ STULZ
This paper considers the pricing of options with default risk. The comparative statics of such options can differ from those of ordinary options, and early exercise of such American call options can be optimal. Several examples of options with default risk are considered.
The Effect of Dividend Changes on Stock and Bond Prices
Published: March 1994 | DOI: 10.1111/j.1540-6261.1994.tb04430.x
UPINDER S. DHILLON, HERB JOHNSON
This study examines stock and bond price reactions to dividend changes. The positive stock market response to dividend increases has several potential explanations, two of the more commonly discussed being information content and wealth redistribution between stockholders and bondholders. The evidence presented supports the wealth redistribution hypothesis but does not rule out the information content hypothesis. Typically we find that the bond price reaction to announcements of large dividend changes is opposite to the stock price reaction. Our results differ from those of Handjinicolaou and Kalay.
Why Option Prices Lag Stock Prices: A Trading‐based Explanation
Published: December 1993 | DOI: 10.1111/j.1540-6261.1993.tb05136.x
KALOK CHAN, Y. PETER CHUNG, HERB JOHNSON
While many studies find that option prices lead stock prices, Stephan and Whaley (1990) find that stocks lead options. We find no evidence that options, even deep out‐of‐the‐money options, lead stocks. After confirming Stephan and Whaley's results, we show their results can be explained as spurious leads induced by infrequent trading of options. We show that the stock lead disappears when the average of the bid and ask prices is used instead of transaction prices. Hence, we find no evidence of arbitrage opportunities associated with the stock lead.