A Fast Literature Search Engine based on top-quality journals, by Dr. Mingze Gao.

• Amin, K. I. (1993). Jump Diffusion Option Valuation in Discrete Time. The Journal of Finance, 48, 1833–1863.

  The author develops a simple, discrete time model to value options when the underlying process follows a jump diffusion process. Multivariate jumps are superimposed on the binomial model of J. C. Cox, S. A. Ross, and M. Rubinstein (1979) to obtain a model with a limiting jump diffusion process. This model incorporates the early exercise feature of American options as well as arbitrary jump distributions. It yields an efficient computational procedure that can be implemented in practice. As an application of the model, the author illustrates some characteristics of the early exercise boundary of American options with certain types of jump distributions.

• Backus, D. K., Gregory, A. W., & Telmer, C. I. (1993). Accounting for Forward Rates in Markets for Foreign Currency. The Journal of Finance, 48, 1887–1908.

  Forward and spot exchange rates between major currencies imply large standard deviations of both predictable returns from currency speculation and of the equilibrium price measure (the intertemporal marginal rate of substitution). Representative agent theory with time-additive preferences cannot account for either of these properties. The authors show that the theory does considerably better along these dimensions when the representative agent's preferences exhibit habit persistence but that the theory fails to reproduce some of the other properties of the data–in particular, the strong autocorrelation of forward premiums.

• Bansal, R., Hsieh, D. A., & Viswanathan, S. (1993). A New Approach to International Arbitrage Pricing. The Journal of Finance, 48, 1719–1747.

  This paper uses a nonlinear arbitrage-pricing model, a conditional linear model, and an unconditional linear model to price international equities, bonds, and forward currency contracts. Unlike linear models, the nonlinear arbitrage-pricing model requires no restrictions on the payoff space, allowing it to price payoffs of options, forward contracts, and other derivative securities. Only the nonlinear arbitrage-pricing model does an adequate job of explaining the time-series behavior of a cross section of international returns.

• Ben-Zion, U., & Lauterbach, B. (1993). Stock Market Crashes and the Performance of Circuit Breakers: Empirical Evidence. The Journal of Finance, 48, 1909–1925.

  This study examines the behavior of a small stock market with circuit breakers and with a one-hour preauction order imbalance disclosure during the October 1987 crash. The crash and its aftershocks lasted for a week and selling pressure was concentrated in higher beta, larger capitalization, and lower leverage firm stocks. Circuit breakers when implemented reduced the next-day opening order imbalance and the initial price loss; however, they had no effect on the long-run response. Some price overreaction and reversal phenomena also are documented.

• Chan, K., Chung, Y. P., & Johnson, H. (1993). Why Option Prices Lag Stock Prices: A Trading-Based Explanation. The Journal of Finance, 48, 1957–1967.

  While many studies find that option prices lead stock prices, J. A. Stephan and R. E. Whaley (1990) find that stocks lead options. The authors find no evidence that options, even deep out-of-the-money options, lead stocks. After confirming Stephan and Whaley's results, they show their results can be explained as spurious leads induced by infrequent trading of options. The authors show that the stock lead disappears when the average of the bid and ask prices is used instead of transaction prices. Hence, they find no evidence of arbitrage opportunities associated with the stock lead.

• Donaldson, R. G., & Uhlig, H. (1993). The Impact of Large Portfolio Insurers on Asset Prices. The Journal of Finance, 48, 1943–1955.

  The authors develop a simple model in which the presence of portfolio insurers in a market of risk-averse traders leads to multiple equilibria for the pricing of financial assets and can cause an increase in volatility, including insurance-induced price drops. They demonstrate, however, that centralized portfolio insurance firms may actually reduce, not increase, volatility even if the existence of these firms increases the total amount of funds under insurance.

• Ederington, L. H., & Goh, J. C. (1993). Is a Bond Rating Downgrade Bad News, Good News, or No News for Stockholders? The Journal of Finance, 48, 2001–2008.

  The authors examine the reaction of common stock returns to bond rating changes. While recent studies find a significant negative stock response to downgrades, they argue that this reaction should not be expected for all downgrades because some rating changes are anticipated by market participants and downgrades because of an anticipated move to transfer wealth from bondholders to stockholders should be good news for stockholders. The authors find that downgrades associated with deteriorating financial prospects convey new negative information to the capital market but that downgrades due to changes in firms' leverage do not.

• Engle, R. F., & Ng, V. K. (1993). Measuring and Testing the Impact of News on Volatility. The Journal of Finance, 48, 1749–1778.

  This paper defines the news impact curve that measures how new information is incorporated into volatility estimates. Various new and existing ARCH models, including a partially nonparametric one, are compared and estimated with daily Japanese stock return data. New diagnostic tests are presented that emphasize the asymmetry of the volatility response to news. The authors' results suggest that the model by L. Glosten, R. Jagannathan, and D. Runkle (1989) is the best parametric model. The EGARCH also can capture most of the asymmetry; however, there is evidence that the variability of the conditional variance implied by the EGARCH is too high.

• Froot, K. A., Scharfstein, D. S., & Stein, J. C. (1993). Risk Management: Coordinating Corporate Investment and Financing Policies. The Journal of Finance, 48, 1629–1658.

  This paper develops a general framework for analyzing corporate risk management policies. We begin by observing that if external sources of finance are more costly to corporations than internally generated funds, there will typically be a benefit to hedging: hedging adds value to the extent that it helps ensure that a corporation has sufficient internal funds available to take advantage of attractive investment opportunities. We then argue that this simple observation has wide ranging implications for the design of risk management strategies. We delineate how these strategies should depend on such factors as shocks to investment and financing opportunities. We also discuss exchange rate hedging strategies for multinationals, as well as strategies involving 'nonlinear'instruments like options.

• Glen, J., & Jorion, P. (1993). Currency Hedging for International Portfolios. The Journal of Finance, 48, 1865–1886.

  This paper examines the benefits from currency hedging, both for speculative and risk minimization motives, in international bond and equity portfolios. The risk-return performances of globally diversified portfolios are compared with and without forward contracts. Over the period 1974 to 1990, inclusion of forward contracts results in statistically significant improvements in the performance of unconditional portfolios containing bonds. Conditional strategies are also implemented, both in sample and out of sample, and are shown to both significantly improve the risk-return tradeoff of global portfolios and to outperform unconditional hedging strategies.