The Journal of Finance

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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Valuing Commercial Mortgages: An Empirical Investigation of the Contingent‐Claims Approach to Pricing Risky Debt

Published: June 1989   |   DOI: 10.1111/j.1540-6261.1989.tb05061.x

SHERIDAN TITMAN, WALTER TOROUS

This paper empirically investigates a contingent‐claims model of commercial mortgage pricing. We find that the magnitude of the observed default premia for a sample of nonprepayable fixed rate bullet mortgages can be explained by the contingent‐claims model. In addition, the model explains a significant proportion of the period‐to‐period changes in the default premia. However, given an assumed negative correlation between building value changes and interest rate changes, the model's risk structure tends to increase less steeply with increasing maturity than the observed risk structure.


The Cyclical Behavior of Interest Rates

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb01119.x

ANTONIO ROMA, WALTER TOROUS

This article investigates the behavior of the term structure of interest rates over the business cycle. In contrast to prior studies that measure the business cycle by the simple growth in aggregate economic activity, we consider the deviation of aggregate economic activity from its potentially stochastic trend. We show that incorporating both an independent trend and cyclical component in consumption improves the efficiency in estimating consumption‐based asset pricing models. We also find that the term spread is more informative about future changes in stochastically detrended real gross domestic product (GDP) than future growth rates in real GDP.


On Jumps in Common Stock Prices and Their Impact on Call Option Pricing

Published: March 1985   |   DOI: 10.1111/j.1540-6261.1985.tb04942.x

CLIFFORD A. BALL, WALTER N. TOROUS

The Black‐Scholes call option pricing model exhibits systematic empirical biases. The Merton call option pricing model, which explicitly admits jumps in the underlying security return process, may potentially eliminate these biases. We provide statistical evidence consistent with the existence of lognormally distributed jumps in a majority of the daily returns of a sample of NYSE listed common stocks. However, we find no operationally significant differences between the Black‐Scholes and Merton model prices of the call options written on the sampled common stocks.


Futures Options and the Volatility of Futures Prices

Published: September 1986   |   DOI: 10.1111/j.1540-6261.1986.tb04553.x

CLIFFORD A. BALL, WALTER N. TOROUS

Assuming nonstochastic interest rates, European futures options are shown to be European options written on a particular asset referred to as a futures bond. Consequently, standard option pricing results may be invoked and standard option pricing techniques may be employed in the case of European futures options. Additional arbitrage restrictions on American futures options are derived. The efficiency of a number of futures option markets is examined. Assuming that at‐the‐money American futures options are priced accurately by Black's European futures option pricing model, the relationship between market participants' ex ante assessment of futures price volatility and the term to maturity of the underlying futures contract is also investigated empirically.


Prepayment and the Valuation of Mortgage‐Backed Securities

Published: June 1989   |   DOI: 10.1111/j.1540-6261.1989.tb05062.x

EDUARDO S. SCHWARTZ, WALTER N. TOROUS

This paper puts forward a valuation framework for mortgage‐backed securities. Rather than imposing an optimal, value‐minimizing call condition, we assume that at each point in time there exists a probability of prepaying; this conditional probability depends upon the prevailing state of the economy. To implement our valuation procedure, we use maximum‐likelihood techniques to estimate a prepayment function in light of recent aggregate GNMA prepayment experience. By integrating this empirical prepayment function into our valuation framework, we provide a complete model to value mortgage‐backed securities.


An Empirical Investigation of U.S. Firms in Reorganization

Published: July 1989   |   DOI: 10.1111/j.1540-6261.1989.tb04389.x

JULIAN R. FRANKS, WALTER N. TOROUS

The purpose of this paper is to understand the institutional features of Chapter 11 from an empirical examination of thirty firms that have emerged from reorganization. We find the recontracting framework of Chapter 11 to be complex, lengthy, and costly. Violations of absolute priority in favor of stockholders are frequently encountered. These deviations may result from the bargaining process of Chapter 11 or from a recontracting process between creditors and stockholders which recognizes the ability of stockholder‐oriented management to preserve firm value. An example of such recontracting addresses Myers' underinvestment problem. An investigation of the effects of Chapter 11 on the pricing of risky debt is also provided.


The Effect of Volatility Changes on the Level of Stock Prices and Subsequent Expected Returns

Published: July 1991   |   DOI: 10.1111/j.1540-6261.1991.tb03774.x

ROBERT A. HAUGEN, ELI TALMOR, WALTER N. TOROUS

This paper estimates volatility changes in daily returns to the Dow Jones Industrial Average over the sample period 1897 through 1988. This allows a direct investigation of the reaction of the level of stock prices and subsequent expected returns to these estimated changes in volatility. We provide empirical evidence consistent with relatively large and systematic revisions in stock prices and subsequent expected returns to volatility changes. However, there appears to be an asymmetry in the market's reaction to volatility increases as opposed to volatility decreases. A majority of our volatility changes cannot be associated with the release of significant economic information.


The Stochastic Volatility of Short‐Term Interest Rates: Some International Evidence

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00191

Clifford A. Ball, Walter N. Torous

This paper estimates a stochastic volatility model of short‐term riskless interest rate dynamics. Estimated interest rate dynamics are broadly similar across a number of countries and reliable evidence of stochastic volatility is found throughout. In contrast to stock returns, interest rate volatility exhibits faster mean‐reverting behavior and innovations in interest rate volatility are negligibly correlated with innovations in interest rates. The less persistent behavior of interest rate volatility reflects the fact that interest rate dynamics are impacted by transient economic shocks such as central bank announcements and other macroeconomic news.