Early exercise decision in american options with dividends, stochastic volatility, and jumps

in Journal of Financial and Quantitative Analysis (2020), 55(1), 331-356

Using a fast numerical technique, we investigate a large database of investors' suboptimal nonexercise of short-maturity American call options on dividend-paying stocks listed on the Dow Jones. The ... [more ▼]

Using a fast numerical technique, we investigate a large database of investors' suboptimal nonexercise of short-maturity American call options on dividend-paying stocks listed on the Dow Jones. The correct modeling of the discrete dividend is essential for a correct calculation of the early exercise boundary, as confirmed by theoretical insights. Pricing with stochastic volatility and jumps instead of the Black--Scholes--Merton benchmark cuts the amount lost by investors through suboptimal exercise by one-quarter. The remaining three-quarters are largely unexplained by transaction fees and may be interpreted as an opportunity cost for the investors to monitor optimal exercise. [less ▲]

Investor Sentiment and Employment

in Journal of Financial and Quantitative Analysis (2019)

We develop a multi-country model with moral hazard and noise traders, and show that investor sentiment should affect employment growth both domestically and abroad. Using a large sample of international ... [more ▼]

We develop a multi-country model with moral hazard and noise traders, and show that investor sentiment should affect employment growth both domestically and abroad. Using a large sample of international industry-level data, we find strong support for the model's predictions. We show that US investor sentiment has a positive association with labor market conditions around the world, due to spillover effects as well as foreign direct investments from the US. We also find that US sentiment amplifies the negative effect of local financial crises on job losses, which supports the idea that financial development has a "dark side". [less ▲]

Improving Portfolio Selection Using Option-Implied Volatility and Skewness

in Journal of Financial and Quantitative Analysis (2013), 48(06), 1813-1845

Our objective in this paper is to examine whether one can use option-implied information to improve the selection of mean-variance portfolios with a large number of stocks, and to document which aspects ... [more ▼]

Our objective in this paper is to examine whether one can use option-implied information to improve the selection of mean-variance portfolios with a large number of stocks, and to document which aspects of option-implied information are most useful to improve their out-of-sample performance. Portfolio performance is measured in terms of volatility, Sharpe ratio, and turnover. Our empirical evidence shows that using option-implied volatility helps to reduce portfolio volatility. Using option-implied correlation does not improve any of the metrics. Using option-implied volatility, risk premium, and skewness to adjust expected returns leads to a substantial improvement in the Sharpe ratio, even after prohibiting short sales and accounting for transaction costs. [less ▲]