Portfolio Of Options Research Articles

Highly Valued Equity and Discretionary Accruals

Abstract: Overvalued equity provides a strong incentive for managers to report earnings that do not disappoint the market ( Jensen, 2005). We find that this can be extended to highly valued equity more generally. In the year following the classification as highly valued and compared to firms with less extreme valuations, highly valued firms have significantly higher discretionary accruals and exhibit a more pronounced positive association between discretionary accruals and proxies for the likelihood of failing to meet earnings targets. These findings are consistent with the use of discretionary accruals to manage earnings in support of extreme valuation. Because highly valued equity will likely result in CEOs with valuable stock and stock option portfolios, we test whether and show that the overvalued equity incentive is incremental to a CEO's equity portfolio incentive. One implication is that directors and audit committees should be especially on guard for possible earnings management when a firm has extremely high valuation multiples and when the CEO has a lot of equity at risk.

Issues in the determination of the optimal portfolio of electricity supply options

In recent years a growing amount of attention has been focused on the need to develop a cost-effective portfolio of electricity supply options that provides society with a measure of protection from such factors as fuel price volatility and supply interruptions. A number of strategies, including portfolio theory, real options theory, and different measures of diversity have been suggested. In this paper we begin by first considering how we might characterize an optimal portfolio of supply options and identify a number of constraints that must be satisfied as part of the optimization process. We then review the strengths and limitations of each approach listed above. The results of our review lead us to conclude that, of the strategies we consider, using the concept of diversity to assess the viability of an electricity supply portfolio is most appropriate. We then provide an example of how a particular measure of diversity, the Shannon–Weiner Index, can be used to assess the diversity of the electricity supply portfolio in the state of Illinois, the region served by the Midwest Independent System Operator (MISO), and the continental United States.

An approximate solution approach for a scenario-based capital budgeting model

Real options techniques such as contingent claims analysis and dynamic programming can be used for project evaluation when the project develops stochastically over time and the decision to invest into this project can be postponed. Following that perspective, Meier et al. (Oper Res 49(2):196–2 06, 2001) presented a scenario based model that captures risk uncertainty and managerial flexibility, maximizing the time-varying of a portfolio of investment options. However, the corresponding linear integer program turns out to be quite intractable even for a small number of projects and time periods. In this paper, we propose a heuristic approach based on an alternative scenario based model involving a much less number of variables. The new approach allows the determination of reasonable quality approximate solutions with huge reductions on the computational times required for solving large size instances.

From research to action: Now we have to move on CCS communication

With rising levels of atmospheric carbon dioxide (CO 2), a portfolio of mitigation options is deemed essential as we transition to a low carbon economy. Carbon dioxide capture and storage (CCS) is one technology that has the potential to mitigate large amounts of CO 2 and governments around the world, along with industry and researchers working in the technology space, are excited by this. However, the technology still remains relatively unknown in the minds of most lay citizens and is therefore less well accepted than more traditional forms of power generation. This paper reviews a number of CCS communication research activities that have been undertaken internationally since 2002 and synthesizes them into a logical roadmap of activities. The paper also examines the common strengths and weaknesses of the research activities and makes a number of suggestions for industry representatives and policy makers. The paper also outlines a way to segment stakeholder groups for all communication activities into four target audiences including: influential others; community; education and project specific activities.

Barriers and enablers to geothermal district heating system development in the United States

Abstract According to the US Energy Information Administration, space and hot water heating represented about 20% of total US energy demand in 2006. Given that most of this demand is met by burning natural gas, propane, and fuel oil, an enormous opportunity exists for directly utilizing indigenous geothermal energy as a cleaner, nearly emissions-free renewable alternative. Although the US is rich in geothermal energy resources, they have been frequently undervalued in America's portfolio of options as a means of offsetting fossil fuel emissions while providing a local, reliable energy source for communities. Currently, there are only 21 operating GDHS in the US with a capacity of about 100 MW thermal. Interviews with current US district heating operators were used to collect data on and analyze the development of these systems. This article presents the current structure of the US regulatory and market environment for GDHS along with a comparative study of district heating in Iceland where geothermal energy is extensively utilized. It goes on to review the barriers and enablers to utilizing geothermal district heating systems (GDHS) in the US for space and hot water heating and provides policy recommendations on how to advance this energy sector in the US.

Sustainable development of the Amazon forest: a fine line between conservation and exploitation?

This essay constitutes a piece of boundary work between science and policy. It illustrates the conflicts, but also the opportunities, that natural resource management encounters in the twenty-first century. I have tried to provide a widely accessible document that argues why a more holistic approach to conservation and natural resource management is imperative. Inspired by the concept of “Integrated Forest Management,” I conceived the basics for an “Integrated Sustainable Development” strategy. I have approached the vast topic of “sustainable development in the Amazon” without complicated methodology because I want to present the problem in its inherent complexity and any other manner would largely exceed the length of an essay. A future scientific challenge is to deepen the analysis of why an integrated approach to conservation and ecosystem management is more likely to succeed than a segregative approach. Ultimately, the more political task, however, is to promote dialogue between the manifold and important stakeholder groups in the Amazon to a point where social, ecological, and economic realities are combined and provide a portfolio of sustainable development options.

Volatility Tests of Stock Returns of an Emerging Market: Evidence from Botswana Stock Exchange

Abstract: This paper attempts to examine the time-series behavior of stock return in an emerging market. The study employs the dynamic time series analytical tools using daily Index return and individual companies daily return listed on the Botswana Stock Exchange (BSE) during 2000 to 2007 sample period. The findings from nonlinear model GARCH (constant volatility) and Component GARCH (time varying volatility) reveals a significant volatility and indicates persistence of both the permanent and transitory component of volatility. The significant transitory component shocks indicates mean reversion tendency of the price series. However, the behavior of the return series can be explained in different ways such as: market imperfections, noise trading, some features of market microstructure may lead to delays of response to new information; transaction cost may make investors reluctant to respond rapidly to the arrival of new information. The implication of the study is that it provides an important input for portfolio management, security valuation, risk management, option pricing, market regulation and monetary policy making. Finally, the study reflects the properties of time series returns in Botswana emerging market not included before contribute to the existing literature.

Risk measures constituting a risk metrics which enables improved decision making: Value-at-Risk

In this work, a novel approach is proposed for expressing the risks of process plants consisting of a large number of scenarios, in the form of a risk metrics of leading indicators to prevent potential high profile industry accidents. The methodology includes: 1) risk estimation of a portfolio by CPQRA (or QRA), 2) monetization of the tangible risks with the inclusion of the lost time of production, 3) estimation of the maximum portfolio loss using Value-at-Risk approach, 4) inclusion of intangible risks using FN-curve and, 5) generation of F$-curve of tangible risks. The proposed methodology can particularly help in understanding the stakes at risk by performing the overall cost-benefit analysis, for identifying the most risky scenarios and identifying critical equipments to enable better risk-informed decision making in order to adopt appropriate risk mitigation measures. This work establishes the groundwork for developing measures for understanding and comparing the large number of risk values derived from QRA studies for large portfolios. It will aid in less subjective decision making as it enables the decision maker to choose the most preferred portfolio option among alternatives. Decisions made with the accurate understanding of the consequences of risks can significantly reduce potential work-related fatalities, property losses and save millions of dollars.

Speed Kills: Analyzing the Deployment of Conventional Ballistic Missiles

Should the United States deploy conventional ballistic missiles (CBMs) in support of the prompt global strike (PGS) mission? Most important, do the political-military benefits outweigh the risks of CBM deployment? The United States, if it works to mitigate the risk of misperception and an inadvertent nuclear response, should deploy near-term CBMs in support of the PGS mission. The prompt response of CBMs would likely be sufficient to defeat many time-sensitive, soft targets, provided actionable intelligence was available. Near-term CBMs, those options capable of being deployed prior to 2013, would have the required attributes to defeat their targets: payload flexibility, throw weight, and accuracy. More specifically, the U.S. Navy's Conventional Trident Modification is a cost-effective, near-term PGS option that would mitigate the concerns of CBM opponents. The large-scale use of midterm and long-term CBMs against mobile targets and hard and deeply buried targets, however, will require a wider range of technologies that have yet to mature. Thus, the United States should continue investing in research and development for a broad portfolio of PGS options to cover the emerging target set.

On Perpetual American Strangles

This article analyzes perpetual American strangles with no recourse to advanced numerical techniques. Our analytical approach rests on an analogy with asymmetric rebates of double knock-out barrier options. The optimal exercise policy is modeled by a couple of boundaries that simultaneously solve a system of two nonlinear equations. Numerical investigations then highlight salient features of American strangles and compare them with portfolios of options that may be used as proxies. Overall, results show that these latter are significantly upward biased in terms of prices and that, more dramatically, they lead the holder to exercise inappropriately.

The smirk in the S&P500 futures options prices: a linearized factor analysis

We construct portfolios of S&P500 futures and their associated options, which are Delta (price) and Vega (volatility) neutral. These systematically earn negative abnormal returns, and suggest that out of the money puts are too expensive, relative to out of the money calls. We give evidence that these negative returns are not a payment for insurance against a market crash. We then do a factor analysis on the Delta hedged option price innovations. Including a 'smirk' factor, there is no evidence of arbitrage opportunities. However, the smirk seems unable to predict the skew in the underlying return, though it is useful for hedging portfolios of options. We finally conclude that the smirk represents the risk premium of a dynamic aversion to market falls, which seems unrelated to the underlying futures index.

Price Discovery in Stock and Option Markets: A Portfolio Approach

In this paper, we propose a new portfolio approach to estimate Hasbrouck's (1995) information share (IS), which measures the relative contribution of one market to the variance of an efficient stock return process. Using GMM, we are able to estimate optimal weights for a portfolio of options to be used in Hasbrouck's (1995) analysis. With our dataset, IS of the option market using only ATM call options lies between 31% and 46%, while IS using a portfolio of options lies between 47% and 58%, a statistically significant increase. This finding indicates that using only one type of options, as often done in the literature, may result in an underestimated measure. We also find that as we increase the resolution of the data from 30 seconds to 15 minutes, the weight of OTM options in a portfolio increases from 18% to 32%. This result shows that the OTM option market's information takes time to be incorporated into stock prices since the information travels across stock and option markets.

Editorial: Gained in translation: how can we facilitate science‐driven innovations in child mental health therapeutics?

Editorial: Gained in translation: how can we facilitate science‐driven innovations in child mental health therapeutics?

Institutional change and higher education

Institutional change includes the supplanting of the old model of production with a new one, the elimination of old markets and the emergence of new ones. As higher education around the world shifts from national markets to an integrated transnational market, and possibly toward a virtual market, Christian higher education, like other market sectors, will have the opportunity to redefine its market niche. Emerging opportunities linked to new institutional rules will challenge higher education in ways that may not yet be obvious to its present managers and faculties. How the university in its portfolio of options might negotiate the elimination of old markets and the creation of new markets is the subject of this essay. A general set of principles and recommendations is offered.

The Impact of Performance-Based CEO and CFO Compensation on Internal Control Quality

In this paper we examine the effects of performance-based compensation on the quality of internal control. We find that the sensitivities of CEO and CFO option portfolios and long-term incentive plans to stock price changes are negatively related to the propensity to report internal control weaknesses between January 2004 and December 2006. We also find that sensitivity is more strongly related to company-level than account-specific control weaknesses. This relation is stronger for CFOs, the officers primarily responsible for the processes generating financial information, and the financial information actually reported by the firm. Despite this positive impact on internal control, compensation sensitivity is positively related to accruals manipulation. Our findings indicate that while SOX disclosures harness the power of compensation schemes to enhance internal control, the controls implemented are not sufficient to eliminate the incentive to manipulate accruals within the bounds of GAAP arising from unvested options and unrestricted equity holdings.

The dynamics of the volatility skew: A Kalman filter approach

Much attention has been devoted to understanding and modeling the dynamics of implied volatility curves and surfaces. This is crucial for both trading, pricing and risk management of option positions. We suggest a simple, yet flexible, model, based on a discrete and linear Kalman filter updating of the volatility skew. From a risk management perspective, we assess whether this model is capable of producing good density forecasts of daily returns on a number of option portfolios. We also compare our model to the sticky-delta and the vega–gamma alternatives. We find that it clearly outperforms both alternatives, given its ability to easily account for movements of different nature in the volatility curve.

The Pricing of Volatility Risk Across Asset Classes and the Fama and French Three Factor Model

We investigate the pricing of aggregate volatility risk across sets of diverse portfolios. In particular, we show that a two factor model comprising a measure of stock market volatility risk and the market excess return factor performs well in explaining the cross-section of returns across portfolios of stocks, corporate bonds and stock options. While previous studies have mainly confined themselves to a single asset class when estimating the market price of volatility risk, our study shows that volatility risk is priced \textit{consistently} (with a negative risk premium) across asset classes.

Optimal Partial Hedging of Options with Small Transaction Costs

This paper uses asymptotic analysis to derive optimal hedging strategies for option portfolios hedged using an imperfectly correlated hedging asset with small fixed and/or proportional transaction costs, obtaining explicit formulae in special cases. This is of use when it is impractical to hedge using the underlying asset itself. The hedging strategy holds a position in the hedging asset whose value lies between two bounds, which are independent of the hedging asset's current value. For low absolute correlation between hedging and hedged assets, highly risk-averse investors and large portfolios, hedging strategies and option values differ significantly from their perfect market equivalents.

UNDERWATER STOCK OPTIONS AND VOLUNTARY EXECUTIVE TURNOVER: A MULTIDISCIPLINARY PERSPECTIVE INTEGRATING BEHAVIORAL AND ECONOMIC THEORIES

In a study of top U.S. executives between 1996 and 2006, we examined the impact of underwater stock options on voluntary turnover. Financial and economic logic suggests that underwater options may carry a positive valuation based on Black–Scholes (BS) pricing, even when the current market price is below the exercise price. However, a variety of psychological and behavioral theories suggest that underwater option portfolios may motivate voluntary turnover to a greater extent than what can be captured by Black–Scholes valuation. Findings supported these perspectives, as underwater options were associated with voluntary executive turnover, after controlling for the BS value of the options and other factors. Moreover, we found evidence that voluntary turnover dynamics differed substantially between CEOs and non‐CEOs.

Incentives, Targeting and Firm Performance: An Analysis of Non-Executive Stock Options

We examine whether options granted to non-executive employees affect firm performance. Using new data on option programs, we explore the link between broad-based option programs, option portfolio implied incentives, and firm operating performance, utilizing an instrumental variables approach to identify causal effects. Firms whose employee option portfolios have higher implied incentives exhibit higher subsequent operating performance. Intuitively, the implied incentive-performance relation is concentrated in firms with fewer employees and in firms with higher growth opportunities. Additionally, the effect is concentrated in firms that grant options broadly to non-executive employees, consistent with theories of cooperation and mutual monitoring among co-workers.