State Pricing, Effectively Complete Markets, and Corporate Finance

23 Pages Posted: 14 Nov 2019

See all articles by Mark Grinblatt

Mark Grinblatt

University of California, Los Angeles (UCLA) - Finance Area; Yale University - International Center for Finance; National Bureau of Economic Research (NBER)

Kam-Ming Wan

Hanken School of Economics

Date Written: October 17, 2019

Abstract

Event study, panel regression, and difference-in-difference techniques are among the most prominent research methodologies in corporate finance. However, these techniques are inappropriate if corporate events are anticipated to some degree, as most events are. This paper proposes options as an additional model-free source of information to identify the likelihood and impact of corporate events. We show how to quantify event impact in a simple example and assert that few restrictions on the state space are required for the approach to work in more complex settings.

Keywords: Event Study, Options, State Prices, Difference-in-Difference Method, Identification

JEL Classification: D44, G14

Suggested Citation

Grinblatt, Mark and Wan, Kam-Ming, State Pricing, Effectively Complete Markets, and Corporate Finance (October 17, 2019). Journal of Corporate Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3481242

Mark Grinblatt

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-1098 (Phone)
310-206-5455 (Fax)

Yale University - International Center for Finance

Box 208200
New Haven, CT 06520-8200
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Kam-Ming Wan (Contact Author)

Hanken School of Economics ( email )

PB 287
Vaasa, Vaasa 65101
Finland

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