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The Valuation of Executive Stock Options in an Intensity-Based Framework

Author

Listed:
  • Peter Carr
  • Vadim Linetsky

Abstract

This paper presents a general intensity-based framework to value executive stock options (ESOs). It builds upon the recent advances in the credit risk modeling arena. The early exercise or forfeiture due to voluntary or involuntary employment termination and the early exercise due to the executive’s desire for liquidity or diversification are modeled as an exogenous point process with random intensity dependent on the stock price. Two analytically tractable specifications are given where the ESO value, expected time of exercise or forfeiture, and the expected stock price at the time of exercise or forfeiture are calculated in closed-form. JEL classification: G13, G39, M41.

Suggested Citation

  • Peter Carr & Vadim Linetsky, 2000. "The Valuation of Executive Stock Options in an Intensity-Based Framework," Review of Finance, European Finance Association, vol. 4(3), pages 211-230.
    • Handle: RePEc:oup:revfin:v:4:y:2000:i:3:p:211-230.
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    File URL: http://hdl.handle.net/10.1023/A:1011441824560
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    More about this item

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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