San-Lin Chung

The Information Content of the S&P 500 Index and VIX Options on the Dynamics of the S&P 500 Index

Given that both S&P 500 index and VIX options essentially contain information about the future dynamics of the S&P 500 index, in this study, we set out to empirically investigate the informational roles played by these two option markets with regard to the prediction of returns, volatility, and density in the S&P 500 index. Our results reveal that the information content implied from these two option markets is not identical. In addition to the information extracted from the S&P 500 index options, all of the predictions for the S&P 500 index are significantly improved by the information recovered from the VIX options. Our findings are robust to various measures of realized volatility and methods of density evaluation.

Option Pricing in a Multi-Asset, Complete Market Economy

This paper extends the seminal Cox-Ross-Rubinstein ((1979), CRR hereafter) binomial model to multiple assets. It differs from previous models in that it is derived under the complete market environment specified by Duffie and Huang (1985) and He (1990).

Generalized Cox-Ross-Rubinstein Binomial Models

This paper generalizes the seminal Cox-Ross-Rubinstein (CRR) binomial model by adding a stretch parameter. The generalized CRR (GCRR) model allows us to fine-tune (via the stretch parameter) the lattice structure so as to efficiently price a range of options, such as barrier options. Our analysis provides insights into the fine structure of convergence of the general binomial model to the Black-Scholes formula. We also discuss how to improve the rate of convergence or the oscillatory behavior of the GCRR model. The numerical results suggest that the GCRR models with various modifications are efficient for pricing a range of options.

American option valuation under stochastic interest rates

By applying Ho, Stapleton and Subrahmanyams (1997, hereafter HSS) generalised Geske–Johnson (1984, hereafter GJ) method, this paper provides analytic solutions for the valuation and hedging of American options in a stochastic interest rate economy. The proposed method simplifies HSSs three-dimensional solution to a one-dimensional solution. The simulations verify that the proposed method is more efficient and accurate than the HSS (1997) method. We illustrate how the price, the delta, and the rho of an American option vary between the stochastic and non-stochastic interest rate models. The magnitude of this effect depends on the moneyness of the option, interest rates, volatilities of the underlying asset price and the bond price, as well as the correlation between them.

Generalized Analytical Upper Bounds for American Option Prices

This paper generalizes and tightens Chen and Yehs (2002) analytical upper bounds for American options under stochastic interest rates, stochastic volatility, and jumps, where American option prices are difficult to compute with accuracy. We first generalize Theorem 1 of Chen and Yeh (2002) and apply it to derive a tighter upper bound for American calls when the interest rate is greater than the dividend yield. Our upper bounds are not only tight, but also converge to accurate American call option prices when the dividend yield or strike price is small or when volatility is large. We then propose a general theorem that can be applied to derive upper bounds for American options whose payoffs depend on several risky assets. As a demonstration, we utilize our general theorem to derive upper bounds for American exchange options and American maximum options on two risky assets.

Ranking Taiwanese management journals: A case study

To improve the quality of journals in Taiwan, the National Science Council (NSC) of the Republic of China evaluates journals in the fields of humanities and social sciences periodically. This paper describes the evaluation of 46 management journals conducted by the authors, as authorized by the NSC. Both a subjective approach, with judgments solicited from 345 experts, and an objective approach, with data collected on four indicators: journal cross citation, dissertation citation, authors’ scholastic reputation, and author diversity, were used to make a comprehensive evaluation. Performance in the four indicators were aggregated using weights which were most favourable to all journals, in a compromise sense, to produce the composite indices. The subjective evaluation reflects the general image, or reputation, of journals while the objective evaluation discloses blind spots which have been overlooked by experts. The results show that using either approach alone would have produced results which are misleading, which suggests that both approaches should be used. All of the editors of the journals being evaluated agreed that the evaluation was appropriate and the results are reasonable.

Bounds and Prices of Currency Cross-Rate Options

This paper derives the pricing bounds of a currency cross-rate option using the option prices of two related dollar rates via a copula theory and presents the analytical properties of the bounds under the Gaussian framework. Our option pricing bounds are useful, because (1) they are general in the sense that they do not rely on the distribution assumptions of the state vari-ables or on the selection of the copula function; (2) they are portfolios of the dollar-rate op-tions and hence are potential hedging instruments for cross-rate options; and (3) they can be applied to generate bounds on deltas. The empirical tests suggest that there are persistent and stable relationships between the market prices and the estimated bounds of the cross-rate op-tions and that our option pricing bounds (obtained from the market prices of options on two dollar rates) and the historical correlation of two dollar rates are highly informative for ex-plaining the prices of the cross-rate options. Moreover, the empirical results are consistent with the predictions of the analytical properties under the Gaussian framework and are robust in various aspects.

Pricing American Options on Foreign Assets in a Stochastic Interest Rate Economy

This paper values American options on foreign assets in a stochastic interest rate economy using a two-point Geske and Johnson (1984) technique. The method requires the valuation of just two options: a European option and a twice-exercisable option. I first derive the risk-neutral distributions of asset prices under two forward risk-adjusted measures. Closed form solutions for European options on foreign assets are then obtained by applying these risk-neutral distributions. This article also provides analytic solutions for pricing twice exercisable options that are at most two-dimensional even though the valuation problem involves four risk factors at two exercise dates. I report the results of numerical evaluations of American option values using my method and show how they vary with the interest rate parameters. I also verify the accuracy of the proposed method by comparing with the benchmark values obtained from the least-square method of Longstaff and Schwartz (2001).

Pricing options with American-style average reset features

This study extends the Hull and White (1993 J. Derivatives 1 21-31) binomial method to construct a trinomial model for the valuation of American-style options whose strike price can be reset to a new level. The reset criterion is conditioned upon the average underlying asset price hitting the reset barrier in a specified period although the model proposed can accommodate other features. For prices benchmarked against ordinary Asian options, we investigate the difference between a daily reset warrant and a period-average reset warrant and find that the number of time steps between observations affects the value of American-style average price options and period-average reset options.

The simplest American and Real Option approximations: Geske-Johnson interpolation in maturity and yield

The American early exercise feature of the Real Option to invest in a new project is important in capital budgeting and project valuation. Closed form solutions for American, and therefore Real, Options are known for two special cases; an infinite horizon generates the Merton (Bell Journal of Economics, 4, 141–83, 1973) solution while a zero dividend yield on the project generates Black-Scholes (Journal of Political Economy, 81, 637–59, 1973) prices since early exercise is never optimal. Geske–Johnson (Journal of Finance, 39, 1511–24, 1984) approximation is extended to a bivariate case by assuming various forms of separability for option prices as a function of time to maturity and yield to produce fully explicit and asymptotically correct approximations. These methods are compared with another simple approximation method due to Barone-Adesi and Whaley (Journal of Finance, 42, 301–20, 1987) and MacMillan (Advances in Futures Options and Research, 2, 117–42, 1987) and the estimated error these expressions contain compared to an accurate numerical benchmark technique.