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Valuing executive stock options under correlated employment shocks

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  • Wang, Xingchun

Abstract

In this paper, we present a valuation framework for pricing executive stock options that incorporates the vesting period, employment shocks as well as time-varying variances of the stock. A GARCH process is used to describe the variance of the stock and employment shocks are captured by a doubly stochastic Poisson process. Additionally, the proposed model allows for the correlation between the intensity and the variance of the stock. In the proposed framework, we derive a closed-form expression for executive stock options and investigate executive stock option prices numerically.

Suggested Citation

  • Wang, Xingchun, 2018. "Valuing executive stock options under correlated employment shocks," Finance Research Letters, Elsevier, vol. 27(C), pages 38-45.
    • Handle: RePEc:eee:finlet:v:27:y:2018:i:c:p:38-45
    DOI: 10.1016/j.frl.2018.02.028
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    References listed on IDEAS

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    1. Carmona, Julio & León, Angel & Vaello-Sebastià, Antoni, 2011. "Pricing executive stock options under employment shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 35(1), pages 97-114, January.
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    5. Sircar, Ronnie & Xiong, Wei, 2007. "A general framework for evaluating executive stock options," Journal of Economic Dynamics and Control, Elsevier, vol. 31(7), pages 2317-2349, July.
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    7. Engle, Robert F & Ng, Victor K, 1993. "Measuring and Testing the Impact of News on Volatility," Journal of Finance, American Finance Association, vol. 48(5), pages 1749-1778, December.
    8. Terence Tai Leung Chong & Yue Ding & Yong Li, 2015. "Executive Stock Option Pricing in China Under Stochastic Volatility," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 35(10), pages 953-960, October.
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    Cited by:

    1. Zhang, Dongyang, 2021. "Does a designed financial system impact polluting firms’ employment? Evidence of an experimental economic policy," Finance Research Letters, Elsevier, vol. 38(C).
    2. Zaevski, Tsvetelin S. & Kounchev, Ognyan & Savov, Mladen, 2019. "Two frameworks for pricing defaultable derivatives," Chaos, Solitons & Fractals, Elsevier, vol. 123(C), pages 309-319.
    3. Wang, Xingchun, 2021. "The values and incentive effects of options on the maximum or the minimum of the stock prices and market index," The North American Journal of Economics and Finance, Elsevier, vol. 55(C).
    4. Zhiwei Su & Xingchun Wang, 2019. "Pricing executive stock options with averaging features under the Heston–Nandi GARCH model," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(9), pages 1056-1084, September.

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    More about this item

    Keywords

    Executive stock options; Employment shocks; GARCH models; Doubly stochastic Poisson process;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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