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

• Hemler, M. L. (1990). The Quality Delivery Option in Treasury Bond Futures Contracts. The Journal of Finance, 45, 1565–1586.

  This paper uses three methods to estimate quality option values for Chicago Board of Trade Treasury bond futures contracts. It presents evidence regarding payoffs from exercising this option at delivery, estimates from a T-bond futures pricing model that incorporates this option, and estimates obtained from an exchange option pricing formula. The results indicate that this option is worth considerably less than reported by A. Kane and A. Marcus (1986). For example, payoffs obtained by switching from the bond cheapest to deliver three months prior to delivery to the one cheapest at time of delivery average less than 0.30 percentage points of par.

• Lewis, K. K. (1990). The Behavior of Eurocurrency Returns Across Different Holding Periods and Monetary Regimes. The Journal of Finance, 45, 1211–1236.

  Recent empirical studies of the risk premium across foreign exchange and other asset markets, such as equity and longer term bonds, have found conflicting evidence about the latent variable model restrictions of the consumption-based intertemporal capital asset pricing model. While studies using data for holding periods of one month or less generally reject the model, evidence using three-month holding periods indicates that the model cannot be rejected when including the returns on long relative to short deposit rates. This paper investigates the sources of differences in results using returns on foreign exchange and Eurocurrency deposits at three different maturities.

• Longstaff, F. A. (1990). Time Varying Term Premia and Traditional Hypotheses About the Term Structure. The Journal of Finance, 45, 1307–1314.

  Empirical evidence of time varying term premia in bond returns is frequently interpreted as evidence against the expectations hypothesis. This paper shows that the expectations hypothesis can actually imply time varying term premia if the time frame for which the expectations hypothesis holds differs from the return measurement period. Furthermore, many of the properties of these term premia are consistent with those of observed term premia. These results are important because they imply that the case against the expectations hypothesis is weaker than claimed in the empirical literature.

• Longstaff, F. A. (1990). Pricing Options With Extendible Maturities: Analysis and Applications. The Journal of Finance, 45, 935–957.

  Many common types of financial contracts incorporates options with extendible maturities. This paper derives closed-form expressions for options that can be extended by the optionholder and presents a number of applications including the valuation of American options with stochastic dividends, junk bonds, and shared-equity mortgages. We also derive closed-form expressions for writer-extendible options and discuss the writer's economic incentives for extending an out-of-the-money option. We apply these results to show that corporate debtholders have a strong incentive to extend the maturity of defaulting debt if there are liquidation costs. We model and solve the debtholders' optimal extension problem and show that the possibility of an extension can induce shareholders in highly levered firms to accept negative NPV projects.

• Boyle, G. W. (1990). International Interest Rates, Exchange Rates, and the Stochastic Structure of Supply. The Journal of Finance, 45, 655–671.

  In a dual-currency, flexible exchange rate model, both nominal and real foreign exchange premia depend on investor risk attitudes, consumption parameters, and the stochastic structure of currency and commodity supplies. When supplies are random, their joint correlation structure determines the sign of the premia. If the money supplies are identically distributed, then all foreign exchange premia, regardless of the currency of denomination, are zero. A positive correlation between the value of a country's currency and its nominal interest rate need not indicate real interest rate movements. Relative bond prices can be negatively correlated with the terms of trade.

• Defusco, R. A., Johnson, R. R., & Zorn, T. S. (1990). The Effect of Executive Stock Option Plans on Stockholders and Bondholders. The Journal of Finance, 45, 617–627.

  Executive stock option plans have asymmetric payoffs that could induce managers to take on more risk. Evidence from traded call options and stock return data supports this notion. Implicit share price variance, computed from the Black-Scholes options pricing model, and stock return variance increase after the approval of an executive stock option plan. The event is accompanied by a significant positive stock and a negative bond market reaction. This evidence is consistent with the notion that executive stock options may induce a wealth transfer from bondholders to stockholders.

• Elton, E. J., Gruber, M. J., & Michaely, R. (1990). The Structure of Spot Rates and Immunization. The Journal of Finance, 45, 629–642.

  Empirical studies of the modern theories of bond pricing typically choose proxies for the state variables in a rather arbitrary fashion. This paper empirically analyzes the question of the optimal spot rates to use as state variables. The authors' findings indicate that the four-year spot rate serves as the best proxy in the one-state-variable model. In the case of the two-state-variables model, the six-year rate and eight-month rate are identified as best. Tests of the out-of-sample prediction ability indicate that their model is superior to F. R. Macaulay's duration model and alternative proxies for state variables.

• Harris, M., & Raviv, A. (1990). Capital Structure and the Informational Role of Debt. The Journal of Finance, 45, 321–349.

  This paper provides a theory of capital structure based on the effect of debt on investors' information about the firm and on their ability to oversee management. The authors postulate that managers are reluctant to relinquish control and unwilling to provide information that could result in such an outcome. Debt is a disciplining device because default allows creditors the option to force the firm into liquidation and generates information useful to investors. The authors characterize the time path of the debt level and obtain comparative statics results on the debt level, bond yield, probability of default, probability of reorganization, etc.

• Chance, D. M. (1990). Default Risk and the Duration of Zero Coupon Bonds. The Journal of Finance, 45, 265–274.

  This paper applies a contingent claims approach to examine the duration of a zero coupon bond subject to default risk. One replicating portfolio for a default-prone zero coupon bond contains a long position in the default-free asset plus a short position in a put option on the underlying assets. The duration of the bond is shown to be a weighted combination of the duration of the default-free bond and the put option. The duration is less than maturity and is not an immunizing duration. The technique is then extended to subordinated debt.

• Gorton, G., & Pennacchi, G. (1990). Financial Intermediaries and Liquidity Creation. The Journal of Finance, 45, 49–71.

  Trading losses associated with information asymmetries can be mitigated by designing securities that split the cash flows of underlying assets. These securities, which can arise endogenously, have values that do not depend on the information known only to informed agents. Bank debt (deposits) is an example of this type of liquid security that protects relatively uninformed agents, and the authors provide a rationale for deposit insurance in this content. High-grade corporate debt and government bonds are other examples, implying that a money market mutual fund based payments system may be an alternative to one based on insured bank deposits.