Ramon Rabinovitch

Pricing Stock and Bond Options when the Default-Free Rate is Stochastic

We derive formulas for the valuation of call options on stocks and bonds when the defaultfree rate is stochastic. The formulas highlight the role of the correlation between the unanticipated returns on the underlying security and the changes in the short-term rate in determining the options value. Our numerical analysis indicates that option prices predicted by the proposed formula differ from those predicted by the Black and Scholes formula when this correlation is relatively large and the short-term rates instantaneous variance is relatively large as well. Moreover, the proposed formula predicts higher (lower) stock option prices than those predicted by the Black and Scholes formula for correlation values that are lower (higher) than some positive critical value.

Returns on ADRs and Arbitrage in Emerging Markets

A removable pier having at least two sections pivotably joined end to end and extending from a footing on a shore into a body of water. The pier sections are removably supported on permanent footings for stability. Booms having cable guides are removably mounted on leg extensions of the inner pier section. Cables, driven by winches, pass through the cable guides on the boom and engage the outer pier section for its removal from the water by rotation about its pivotable connection with the inner pier section. The booms are transferred to mounts on the shore at the sides of the pier for removal of the inner pier section from the water with the outer pier section in overlying position. The outer pier section is preferably slightly shorter than the inner pier section so that both pier sections can be stored in upright position on the shore ready for repositioning in the water.

CEO Entrenchment and Corporate Hedging: Evidence from the Oil and Gas Industry

What are the primary determinants of risk management by firms and what, in particular, is the role of managerial entrenchment and free cash flow agency costs? We examine these issues using a unique dataset with detailed quarterly data on hedging by upstream oil and gas firms during 1996-2008. The extent of risk management (hedging intensity) is positively related to factors that amplify entrenchment and free cash flow agency costs, such as long CEO tenure, high CEO stock ownership, and weak board governance. There is also robust evidence that hedging is motivated by the reduction of financial distress and borrowing costs, and is influenced by both intrinsic cash flow risk and temporary spikes in commodity price volatility. Our analysis presents a comprehensive perspective on the determinants of risk management where the main factors are largely consistent with the predictions of the theoretical literatures on risk management and agency costs.

Ranking by Pairwise Comparisons with Special Reference to Ordering Portfolios

SYNOPTIC ABSTRACT The problem of ranking k ≥ 3 objects by pairwise comparisons is analyzed. A new criterion for optimal ranking in terms of the pairwise dominance probabilities is introduced, and its application based on corresponding estimated probabilities is discussed and demonstrated. Ranking by pairwise comparisons in situations where ordering according to values of a common performance measure is possible is also discussed with special reference to ordering portfolios. The new criterion calls for maximizing the probability of a full agreement between an ordering and all the induced pairwise comparisons (over all orderings). A specific example is used to demonstrate the new method in the context of portfolio analysis, to compare with the method of Owen and Rabinovitch (1999), and to indicate the need for further research.

CEO Entrenchment and Corporate Risk Management

Will corporations hedge even if risk management does not raise firm value? We address this question by examining theoretically and empirically the effects of CEO entrenchment and overinvestment on corporate hedging. Our theoretical analysis indicates that the avoidance of financial distress costs and managerial risk aversion are not necessary for hedging and risk management by corporations. We also generate novel predictions on the influence of entrenchment related factors, CEO equity ownership, and available cash flows on hedging. Using a unique hand-collected dataset with detailed quarterly data on hedging by non-integrated exploration and production firms in the oil and gas industry, we test these predictions and find support for them. Corporate hedging intensity is positively (or negatively) related to internal and external governance factors that enhance (or weaken) CEO entrenchment, even after controlling for leverage, size, risk, and the marginal tax rate. Our study provides a new perspective and evidence on the determinants of corporate hedging.

Managerial Entrenchment and Corporate Risk Management

We theoretically and empirically analyze the effects of managerial agency on corporate hedging and risk management. Our theoretical analysis indicates that even risk neutral entrenched managers of unlevered firms will optimally establish costly hedging positions. Moreover, our model presents novel prediction on the relationship between the extent of risk management and the level of managerial entrenchment and available cash flows. Using a unique and hand-collected dataset with detailed quarterly information on derivative positions by non-integrated exploration and production firms in the oil and gas industry during 1996-2008, we test these predictions and find strong support for them, even after controlling for factors used in the earlier literature. We thus provide a theoretical and empirical explanation for why corporations hedge even when it does not increase firm value.

Leverage and the Cross-Section of Equity Returns

Building on the theoretical asset pricing literature, we examine the role of market risk and the size, book-to-market (BTM), and volatility anomalies in the cross-section of unlevered equity returns. Compared with levered (stock) returns, the unlevered market beta plays a more important role in explaining the cross-section of unlevered equity returns, even when we control for size and BTM. The size effect is weakened, while the value premium and the volatility puzzle virtually disappear for unlevered returns. We show that leverage induces heteroskedasticity in returns. Unlevering returns removes this pattern, which is otherwise difficult to address by controlling for leverage in regressions.

Evaluating random choice models using multivariate correlation analysis

Researchers often use specific models to predict the vector of selection probabilities , for some population of decision makers. We assume that the i-th decision makers vector of selection probabilities follows some prior cross-sectional distribution ,. (v being the parameter vector of F.) To assess the predictive power of random choice models we use two data sets: , the model-based estimates, and r i, the sample-based relative frequency vectors. We suggest the use of the correlation coefficient between . Estimates of the latter are given for an arbitrary F(π,v) and when F is the Dirichlet distribution. In the latter case we show that . We use a distribution free estimation method, the method of moments and the maximum likelihood estimation method to estimate . These estimation methods are tested and evaluated in a Monte Carlo study that simulates a six-brand product class. The third method is found superior to the other two.