The Journal of Finance

Consensus Beliefs Equilibrium and Market Efficiency

Published: 06/01/1983   |   DOI: 10.1111/j.1540-6261.1983.tb02509.x

DAVID EASLEY, ROBERT A. JARROW

This paper presents an analysis of the concept of consensus beliefs and its relation to market efficiency. We show that unless traders have rational expectations, the two published interpretations of consensus beliefs are not useful for considerations of market efficiency. One interpretation (see Verrecchia [6]) has no implication for market efficiency. Under the second interpretation (see Verrecchia [7], [8]) consensus beliefs equilibria are efficient, but they typically do not exist unless traders have rational expectations.

THE RELATIONSHIP BETWEEN YIELD, RISK, AND RETURN OF CORPORATE BONDS

Published: 09/01/1978   |   DOI: 10.1111/j.1540-6261.1978.tb02061.x

Robert A. Jarrow

Primes and Scores: An Essay on Market Imperfections

Published: 12/01/1989   |   DOI: 10.1111/j.1540-6261.1989.tb02653.x

ROBERT A. JARROW, MAUREEN O'HARA

This paper investigates the reported relative mispricing of primes and scores to the underlying stock. Given transaction costs, we establish arbitrage‐based bounds on prime and score prices. We then develop a new nonparametric statistical technique to test whether prime and score prices violate these bounds. We find that prime and score prices do exceed stock prices, and often by a considerable amount. We demonstrate that this increased value is most likely due to the score's ability to save on the costs of dynamic hedging. We also show how short sale and trust size constraints impede the ability to arbitrage price disparities.

Pricing Derivatives on Financial Securities Subject to Credit Risk

Published: 03/01/1995   |   DOI: 10.1111/j.1540-6261.1995.tb05167.x

ROBERT A. JARROW, STUART M. TURNBULL

This article provides a new methodology for pricing and hedging derivative securities involving credit risk. Two types of credit risks are considered. The first is where the asset underlying the derivative security may default. The second is where the writer of the derivative security may default. We apply the foreign currency analogy of Jarrow and Turnbull (1991) to decompose the dollar payoff from a risky security into a certain payoff and a “spot exchange rate.” Arbitrage‐free valuation techniques are then employed. This methodology can be applied to corporate debt and over the counter derivatives, such as swaps and caps.

Counterparty Risk and the Pricing of Defaultable Securities

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00389

Robert A. Jarrow, Fan Yu

Motivated by recent financial crises in East Asia and the United States where the downfall of a small number of firms had an economy‐wide impact, this paper generalizes existing reduced‐form models to include default intensities dependent on the default of a counterparty. In this model, firms have correlated defaults due not only to an exposure to common risk factors, but also to firm‐specific risks that are termed “counterparty risks.” Numerical examples illustrate the effect of counterparty risk on the pricing of defaultable bonds and credit derivatives such as default swaps.

Arbitrage, Continuous Trading, and Margin Requirements

Published: 12/01/1987   |   DOI: 10.1111/j.1540-6261.1987.tb04357.x

DAVID C. HEATH, ROBERT A. JARROW

This paper studies the impact that margin requirements have on both the existence of arbitrage opportunities and the valuation of call options. In the context of the Black‐Scholes economy, margin restrictions are shown to exclude continuous‐trading arbitrage opportunities and, with two additional hypotheses, still to allow the Black‐Scholes call model to apply. The Black‐Scholes economy consists of a continuously traded stock with a price process that follows a geometric Brownian motion and a continuously traded bond with a price process that is deterministic.