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The Theory of the Trading Firm Revisited: Discussion

Journal of Finance 1978 33(3), 1031
Frederick L. A. Grauer, The Theory of the Trading Firm Revisited: Discussion, The Journal of Finance, Vol. 33, No. 3, Papers and Proceedings of the Thirty-Sixth Annual Meeting American Finance Association, New York City December 28-30, 1977 (Jun., 1978), pp. 1031-1033

The Pricing of Options with Stochastic Dividend Yield

Journal of Finance 1978 33(2), 617
A formula is derived in discrete time for pricing options when the underlying stock has a stochastic dividend yield. The result implies that regarding the dividend yield as certain when it is not results in misestimation of the variance of the underlying stock. Comparative statics indicate that this adjustment could diminish a bias of the Black-Scholes model. This model systematically underprices deep-out-of-the-money options. A numerical example demonstrates that this stochastic adjustment may be more important for longer-lived options and warrants.