Financial Derivatives Pricing: Selected Works of Robert Jarrow

609 Pages·2008·2.29 MB·English

by  Robert A. Jarrow

FINANCIAL DERIVATIVES PRICING
Selected Works of Robert Iarrow
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Selected Works of
Robert Jarrow
FINANCIAL
DERIVATIVES
PRICING
ROBERT A JARROW
Cornell University, USA
1:0
World Scientific
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FINANCIAL DERIVATIVES PRICING
Selected Works of Robert Jarrow
Copyright © 2008 by World Scientific Publishing Co. Pte. Ltd.
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ISBN-13 978-981-281-920-8
ISBN-IO 981-281-920-7
Printed in Singapore by World Scientific Printers
Acknowledgments
We would like to thank the publishers and publications who granted the reprint
permissions for the following papers:
1. Reprinted from Journal of Financial Economics, 10(3), Jarrow, R and A. Rudd,
Approximate Option Valuation for Arbitrary Stochastic Processes, 347-369,
Copyright (1982), with permission from Elsevier.
2. Heath, D and R. Jarrow (1987). Arbitrage, Continuous Trading, and Margin
Requirements. Journal of Finance, 5, 1129-1142. Reprinted with kind permission of
Blackwell Publishing.
3. Heath, D and R. Jarrow (1988). Ex-Dividend Stock Price Behavior and Arbitrage
Opportunities. Journal of Business, 61 (1),95-108. Reprinted with kind permission
of the University of Chicago Press.
4. Carr, P and R. Jarrow (1990). The Stop-Loss Start-Gain Paradox and Option
Valuation: A New Decomposition into Intrinsic and Time Value. Review of
Financial Studies, 3 (3), 469-492. Reprinted with kind permission of Oxford
University Press.
5. Carr, P, R. Jarrow and R. Myneni (1992). Alternative Characterizations of American
Put Options. Mathematical Finance, 2 (2), 87-106. Reprinted with kind permission
of Blackwell Publishing.
6. Jarrow, R (1992). Market Manipulation, Bubbles, Corners, and Short Squeezes.
Journal of Financial and Quantitative Analysis, 27 (3), 311-336. Reprinted with kind
permission of University of Washington, School of Business Administration.
7. Jarrow, R (1994). Derivative Security Markets, Market Manipulation, and Option
Pricing Theory. Journal of Financial and Quantitative Analysis, 29 (2), 241-261.
Reprinted with kind permission of University of Washington, School of Business
Administration.
8. With kind permission from Springer Science+Business Media: Finance and
Stochastics, Liquidity Risk and Arbitrage Pricing Theory, 8(3), 2004, 311-341,
<;etin, U, R. Jarrow and P. Protter. © Springer-Verlag 2004.
9. <;etin, U, R. Jarrow, P. Protter and M. Warachka (2006). Pricing Options in an
Extended Black-Scholes Economy with Illiquidity: Theory and Empirical Evidence.
Review of Financial Studies, 19 (2), 493-529. Reprinted with kind permission of the
Oxford University Press for Society for Financial Studies.
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10. This article was published in Journal of Banking and Finance, 5, larrow, R,
Liquidity Premiums and the Expectations Hypothesis, 539-546, Copyright Elsevier
(1981).
11. larrow, Rand G. Oldfield (1981). Forward Contracts and Futures Contracts. Journal
of Financial Economics, 4, 373-382. Reprinted with kind permission of Oxford
University Press.
12. This article was published in Advances in Futures and Options Research, 2, larrow,
R, The Pricing of Commodity Options with Stochastic Interest Rates, 19-45,
Copyright Elsevier (1981).
13. Heath, D, R. Jarrow, and A. Morton (1992). Bond Pricing and the Term Structure of
Interest Rates: A New Methodology for Contingent Claims Valuation. Econometrica,
60 (1), 77-105. Reprinted with kind permission of The Econometric Society.
14. Reprinted from Journal of International Money and Finance, 10 (3), Amin, K and R.
Jarrow, Pricing Foreign Currency Options Under Stochastic Interest Rates, 310-329,
Copyright (1991), with permission from Elsevier.
15. Amin, K and R. Jarrow (1992). Pricing Options on Risky Assets in a Stochastic
Interest Rate Economy. Mathematical Finance, 2 (4), 217-237. Reprinted with kind
permission of Blackwell Publishing.
16. Jarrow, Rand Y. Yildirim (2003). Pricing Treasury Inflation Protected Securities and
Related Derivatives Using an HJM Model. Journal of Financial and Quantitative
Analysis, 38 (2), 337-358. Reprinted with kind permission of University of
Washington, School of Business Administration.
17. Jarrow, Rand S. Turnbull (1995). Pricing Derivatives on Financial Securities Subject
to Credit Risk. Journal of Finance, 50 (1), (March), 53-85. Reprinted with kind
permission of Blackwell Publishing.
18. R. Jarrow, D. Lando and S. Turnbull (1997). A Markov Model for the Term
Structure of Credit Risk Spreads. Review of Financial Studies, 10 (2), 481-523.
Reprinted with kind permission of Oxford University Press.
19. Jarrow, R, D. Lando and F. Yu (2005). Default Risk and Diversification: Theory and
Empirical Implications. Mathematical Finance, 15 (1), 1-26. Reprinted with kind
permission of Blackwell Publishing.
20. Jarrow, Rand F. Yu (2001). Counterparty Risk and the Pricing of Defaultable
Securities. Journal of Finance, 56 (5), 1765-1799. Reprinted with kind permission of
Blackwell Publishing.
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21. With kind permission from Springer Science+Business Media: Review of Finance,
Bankruptcy Prediction with Industry Effects, 8 (4), 2004, 537-569, Chava, Sand R.
Jarrow. © 2004 Kluwer Academic Publishers. Printed in Netherlands.
22. With kind permission from Springer Science+Business Media: Journal of Financial
Services Research, Market Pricing of Deposit Insurance, 24 (2/3), 2003, 93-119,
Duffie, D, R. Jarrow, A. Purnanandam and W. Yang. © 2003 Kluwer Academic
Publishers. Manufactured in The Netherlands.
23. C;etin, U, R. Jarrow, P. Protter and Y. Yildirim (2004). Modeling Credit Risk with
Partial Information. The Annals of Applied Probability, 14 (3),1167-1178. Reprinted
with kind permission of Institute of Mathematical Statistics.
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Preface
I consider myself fortunate that World Scientific Publishing Co. is putting out my
selected works in a single volume. This volume will make it easier for researchers and
students to find these essays and read them as an integrated collection. Through
out my career, I have published many papers in the subfields of finance - corporate
finance, financial institutions (banking), asset pricing, and derivatives - mostly the
ory, but sometimes empirical papers as well. In my writings, three themes can be
identified. The first theme is that I am constantly striving to better understand the
robustness of financial models. That is, do the results in a particular model extend
when the assumptions are modified, and if not, how do the results change? The
second theme is that I am concerned with "real" world problems - unsolved ques
tions relevant to current industry practice. After all, finance is an applied economic
science. The third theme relates to my approach to research. To solve financial
problems, I rely on the rigorous use of mathematics and economics. In fact, it is
fair to say that my research is really mathematical economics, or a more recent
offshoot, mathematical finance.
For this collection of readings, I have selected a subset of my papers related
to financial derivatives and risk management. This topic is of heightened current
interest in academics and industry due to the recent subprime generated financial
crisis of 2007. The subprime crisis involved significant losses in credit derivatives,
including subprime mortgage asset-backed securities (ABS), credit default swaps
(CDS) on subprime ABS, and collateralized default obligations (CDOs) on subprime
ABS. Both the inadequate pricing and hedging of these interest-rate and credit-risk
sensitive subprime-backed derivatives is alleged to have contributed to the financial
crisis.
I have eagerly pursued research in financial derivatives, alternatively called -
option pricing and hedging - since my graduate student days at the Massachusetts
Institute of Technology (M.I.T). Indeed, my Ph.D. studies took place in the early
years of option pricing theory (1976 - 1979). These studies gave me my first rigorous
exposure to risk management by the masters themselves, Robert Merton and Fischer
Black. Many of my research ideas were germinated in those early years through long
conversations with fellow Ph.D. students, taking courses, or attending seminars.
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