The Long and Short of it: Why are Stocks with Shorter Runs Preferred?

Posted: 9 Mar 2011 Last revised: 14 Mar 2011

See all articles by Priya Raghubir

Priya Raghubir

University of California, Berkeley - Marketing Group

Sanjiv Ranjan Das

Santa Clara University - Leavey School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: April 1, 2010

Abstract

This paper develops a framework for modeling risky debt and valuing credit derivatives that is flexible and simple to implement, and that is, to the maximum extent possible, based on observables. Our approach is based on expanding the Heath-Jarrow-Morton term-structure model to allow for defaultable debt. Rather than follow the procedure of implying out the behavior of spreads from assumptions concerning the default process, we work directly with the evolution of spreads. The risk-neutral drifts in the resulting model possess a recursive representation that facilitates implementation and makes it possible to handle path-dependence and early exercise features without difficulty. The framework permits embedding a variety of specifications for default; we present an empirical example of a default structure which provides promising calibration results.

Suggested Citation

Raghubir, Priya and Das, Sanjiv Ranjan, The Long and Short of it: Why are Stocks with Shorter Runs Preferred? (April 1, 2010). Journal of Consumer Research, Vol. 36, 2010. Available at SSRN: https://ssrn.com/abstract=1669553

Priya Raghubir (Contact Author)

University of California, Berkeley - Marketing Group ( email )

Haas School of Business
Berkeley, CA 94720
United States
510-643-1899 (Phone)
510-643-1420 (Fax)

Sanjiv Ranjan Das

Santa Clara University - Leavey School of Business ( email )

Department of Finance
316M Lucas Hall
Santa Clara, CA 95053
United States

HOME PAGE: http://algo.scu.edu/~sanjivdas/

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