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Abstract:
We introduce a nonparametric method to accurately price American style contingent claims. This method uses only historical stock price data, not option price data, to generate the American option price. We test the accuracy of this method in a controlled experimental environment under both Black & Scholes (1973) and Heston (1993) assumptions and perform an error-metric analysis. These numerical experiments demonstrate that this method is an accurate and precise method of pricing American options under a variety of market conditions.

Option pricing, American options, nonparametric methods, entropy

Abstract:
We explore the benefits gained by actively managing asymmetric dependence during the portfolio construction process. First, we determine the existing and nature of asymmetric dependency between international equity indices. Next, we illustrate how managing lower tail dependence between long/short and long only portfolio's results in a reduction in downside return movements with little expense to upside changes. We also find an accompanying reduction in the variability in returns over time. Finally, managing asymmetric dependency yields reduced changes in asset weights providing for reduced portfolio turnover as well as lower transaction costs and taxes which are often tied to the buying and selling of assets.

Portfolio selection, Asymmetric dependence, Lower Tail Dependence, Copula functions, Conditional Value-at-Risk

Abstract:
We examine firm valuation under the condition of volatile earnings growth. The Stochastic Earnings Valuation Model (Abaphai, Georgikopoulos, Hasnip, Jamie, Kim, and Wilmott, 1996; Li, 2003) is a relatively new model of equity valuation and is used here to derive a partial differential equation for the PE ratio of firms with volatile earnings growth. We derive an expression for the PE ratio for a firm with no debt and determine the conditions under which the solution to the SEVM is equivalent to the Dividend Discount Model (DDM). We also examine the value of firm equity, with volatile earnings growth, both in the absence and presence of debt. We find that in the presence of debt, the volatility of earnings has a significant effect on the price of earnings. We also illustrate that this relationship is non-linear. Analysis of this model yields several insights into previously documented empirical results, including the 'value' effect on equity prices along with asymmetric market responses to unexpected earnings announcements.

PE ratio, volatile earnings growth, equity valuation, SEVM

Abstract:
A nonparametric method of pricing American options was recently developed that requires only historical underlying price data (Alcock and Carmichael, 2008). We derive an extension to this method to include conditioning information from a small number of observed option prices. This additional information improves the overall accuracy of the method and enables pricing of illiquid options in an incomplete market. We explore the statistical properties of both the original method and our extension using a series of simulation studies. The original method slightly outperforms Black-Scholes estimators and numerical estimators (Crank-Nicholson) that use historical volatility. In contrast, the extended method presented here produces significant reductions in mean pricing errors. These reductions are most dramatic for out-of-the-money options; a result that is consistent with empirical results for related entropic methodologies for pricing European options.

Nonparametric Option Pricing, American Options, Canonical Pricing

Abstract:
We examine the role that secondary mathematics plays in the performance of students in introductory business courses. Students who pass more advanced secondary mathematics subjects perform significantly better in introductory business courses. This mathematics effect is significantly stronger than the effect of other business-related secondary subjects, such as economics or accounting. Our findings also confirm previous studies showing that secondary accounting is beneficial for studying first-year tertiary accounting. Interestingly though, we find that studying secondary economics can detract from a student's introductory tertiary results in some courses. Our findings have implications for educators and administrators as well as current secondary students.

Abstract:
We examine the role that secondary Mathematics plays in the performance of students in introductory Business courses. Students who pass more advanced secondary Mathematics subjects perform significantly better in introductory Business courses. This 'Mathematics effect' is significantly stronger than the effect of other business related secondary subjects, such as Economics or Accounting. Our findings also confirm previous studies showing that secondary Accounting is beneficial for studying first year tertiary Accounting. Interestingly though, we find that studying secondary Economics can detract from a student's introductory tertiary results in some courses. Our findings have implications for educators and administrators as well as current secondary students.

Education, Finance, Accounting, Mathematics

Abstract:
We examine the determinants of debt maturity in the Australian capital market. The validity of traditional maturity theories is empirically examined using the Top 400 firms listed on the Australian Stock Exchange for the period 1996-2005. We find that Australian firms consider transaction costs and the effect of information asymmetries when determining debt maturity. Interestingly we find little support for the asset-matching principle, which is often cited as the most common determinant of maturity policy. We also find that firms consider the correlation between earnings and interest rates when determining maturity, although it is likely that the emergence of interest rate derivatives has reversed the role played by this correlation. Finally we examine the changes in maturity factors over a recent period of significant personal and corporate taxation changes (2000-2001). After the period of taxation changes, the role played by agency costs and asset maturity appear to increase in importance.

Debt Maturity, Capital Structure, Imperfect Markets

Abstract:
Alcock and Carmichael (2008) introduce a nonparametric method for pricing American style options that is derived from the canonical valuation developed by Stutzer (1996). While the statistical properties of this nonparametric pricing methodology have been studied in a controlled simulation environment, no study has yet examined the empirical validity of this method.We introduce an extension to this method that incorporates information contained in a small number of observed option prices. We explore the applicability of both the original method and our extension using a large sample of OEX American index options traded on the S&P100 index. While the Alcock and Carmichael (2008) method fails to outperform a traditional implied volatility based Black-Scholes valuation or a Binomial Tree approach, our extension generates signicantly lower pricing errors and performs comparably well to the implied-volatility Black-Scholes pricing, in particular for out-of-the-money American put options.

Nonparametric option pricing, American options, S&P100 Index, OEX options

Abstract:
We demonstrate a means of incorporating asymmetric dependency structures during the portfolio construction process using copula functions. Specifically, we investigate how asymmetric return dependencies affect the efficient frontier and subsequent portfolio performance under a dynamic rebalancing framework assuming normally distributed marginal returns. By considering the problem of tactically allocating a small set of domestic equity indices, we demonstrate several findings. First, we show that a Mean-Variance efficient frontier differs from the efficient frontier constructed under asymmetric dependence. Constructing paper portfolios based upon these differences, we find that real economic value lies in correctly accounting for asymmetric correlation structures. The primary source of this economic value stems from the ability to better protect portfolio value and reduce the size of any erosion in return relative to the normal portfolio.

Portfolio selection, Copula functions, Conditional Value-at-Risk, Asymmetric dependence

Abstract:
We outline a method of portfolio selection incorporating asymmetric dependency structures using copula functions. Assuming normally distributed marginal returns, we illustrate how asymmetric return correlations affect the efficient frontier and subsequent portfolio performance under a dynamic rebalancing framework. Implementing this methodology within the context of tactically allocating a small set of market indices, we demonstrate several key findings. First, we establish the manner by which the efficient frontier constructed under asymmetric dependence differs from a mean-variance frontier. By establishing a paper portfolio based on these differences, we find that asymmetric correlation structures do have real economic value. The primary source of this economic value is the ability to better protect portfolio value and reduce the size of any erosion in return relative to the normal portfolio when asymmetric return correlations are accounted for.

Abstract:
No abstract available.

Abstract:
We investigate whether asymmetric dependence (AD) is priced in US equities. Using a ß and idiosyncratic risk invariant measure of AD, we find that AD is as important as linear dependence in explaining the variation in returns. In particular, we find a significant positive (negative) relationship between lower (upper) tail dependence and returns. This result holds after controlling for size, robust ß, downside ß, coskewness and cokurtosis. We also find past AD is a significant variable in predicting future returns for small firms. However neither AD nor linear dependence predict the future returns of large firms. Our results suggest that there are multiple dimensions to systematic risk.v

Asymmetric dependence, asset pricing