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Finance and Financial Management Commons™

Open Access. Powered by Scholars. Published by Universities.®

University of Richmond

2006

Articles 1 - 7 of 7

Full-Text Articles in Finance and Financial Management

Implied Binomial Trees In Excel Without Vba, Tom Arnold, Timothy Falcon Crack, Adam Schwartz Oct 2006

Implied Binomial Trees In Excel Without Vba, Tom Arnold, Timothy Falcon Crack, Adam Schwartz

Finance Faculty Publications

We implement a Rubinstein-type (1994) implied binomial tree using an Excel spreadsheet, but without using VBA (Visual Basic Application). We demonstrate both the optimization needed to generate implied ending risk-neutral probabilities from a set of actual option prices and the backwards recursion needed to solve for the entire implied tree. By using only standard Excel spreadsheet functions, and not resorting to VBA, this complicated option pricing technique is now immediately transparent to academics, students, and practitioners alike. The intuition gained from our simple spreadsheet can be applied directly to the estimation of more complicated implied trees using more advanced software. …

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The Relationship Between The Value Effect And Industry Affiliation, John C. Banko, C. Mitchell Conover, Gerald R. Jensen Sep 2006

The Relationship Between The Value Effect And Industry Affiliation, John C. Banko, C. Mitchell Conover, Gerald R. Jensen

Finance Faculty Publications

We examine industry affiliation and the relationship between stock returns and book‐to‐market equity (the value effect). The robustness of the value effect is supported as a significant value premium is shown to exist in 15 of 21 industries. Both industry and firm‐level value effects are identified; however, the firm‐level effect is the more prominent of the two. Further, the value effect is shown to be strongest in value industries and weakest in growth industries. Finally, we show evidence consistent with the claim that the value premium is due to investors requiring higher returns from firms in distressed conditions.

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Applying Altman's Z-Score In The Classroom, Tom Arnold, John H. Earl Jr. Jul 2006

Applying Altman's Z-Score In The Classroom, Tom Arnold, John H. Earl Jr.

Finance Faculty Publications

Altman's Z-score is introduced in an Excel framework to produce a quick calculation of the Z-score with actual financial data available through the Internet. The lesson plan developed is easily introduced with topics covering ratio analysis, financial risk, bond rating changes, and bankruptcy. Given the wide use of the Z-score in practice to evaluate credit risk (or bankruptcy risk), the lesson plan produces a skill set that is very marketable.

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Adding Depth To The Discussion Of Capital Budgeting Techniques, Tom Arnold, Terry D. Nixon Jul 2006

Adding Depth To The Discussion Of Capital Budgeting Techniques, Tom Arnold, Terry D. Nixon

Finance Faculty Publications

The subject of capital budgeting generally encompasses a significant percentage of any beginning finance course with net present value (NPV) often receiving the most attention. Even after this substantial time allotment, critical assumptions and comparisons of the different techniques (such as payback period, discounted payback period, NPV and IRR) are frequently glossed over due to time constraints. Consequently, the goal of this paper is to present these non-NPV techniques in a manner that allows the beginning finance student to expeditiously see the intuition, inherent assumptions, and any connection with the more popular NPV calculation. A small portion of this paper …

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Getting More Out Of Two Asset Portfolios, Tom Arnold, Terry D. Nixon Apr 2006

Getting More Out Of Two Asset Portfolios, Tom Arnold, Terry D. Nixon

Finance Faculty Publications

Two-asset portfolio mathematics is a fixture in many introductory finance and investment courses. However, the actual development of the efficient frontier and capital market line are generally left to a heuristic discussion with diagrams. In this article, the mathematics for calculating these attributes of two-asset portfolios are introduced in a framework intended for the undergraduate classroom.

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Using Gmm To Flatten The Option Volatility Smile, Tom Arnold Mar 2006

Using Gmm To Flatten The Option Volatility Smile, Tom Arnold

Finance Faculty Publications

By using an over-identified Generalized Method of Moments (GMM) estimation procedure with careful consideration for data biases existing in the previous literature, parameters are estimated for a stochastic volatility jump diffusion option pricing (SVJ) model. The estimated parameters indicate a statistically significant highly negative infrequent jump process in the underlying security return distribution consistent with market crashes. When comparing to a stochastic volatility (SV) option pricing model, the SVJ is more robust but not always the superior model. The robustness of the models is further gauged by evaluating performance up to a year beyond the estimation data.

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Do Option Markets Substitute For Stock Markets?, Tom Arnold, Gayle Erwin, Lance Nail, Terry D. Nixon Jan 2006

Do Option Markets Substitute For Stock Markets?, Tom Arnold, Gayle Erwin, Lance Nail, Terry D. Nixon

Finance Faculty Publications

Using a sample of cash tender offers occurring between 1993 and 2002, we find evidence that the options market has become the preferred venue for traders attempting to profit on anticipated announcements. Options offer advantages relative to stocks. Traders gain leverage by trading in options and multiple options contracts on an individual stock. The results of our study indicate that a substitution effect does exist. Abnormal volume in the option market replaces abnormal volume in the stock market prior to cash tender offer announcements, and this abnormal option volume precedes abnormal stock volume for targets with or without traded options.

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