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Finance - Research Publications
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ItemOn the upper bound of a call optionHandley, JC (Springer Science and Business Media LLC, 2005-08-01)
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ItemRe-examination of the historical equity risk premium in AustraliaBrailsford, T ; Handley, JC ; Maheswaran, K (BLACKWELL PUBLISHING, 2008-03)Abstract In light of the ongoing debate over the value of the equity risk premium, its increasing use in the regulatory setting, and the impact of dividend imputation on the premium, this paper presents a timely new look at the historical equity risk premium in Australia, and provides an improved understanding of the historical record. We document concerns about data quality that become increasingly important the further back in time one looks. In particular, there are sufficient question marks over the quality of data prior to 1958 to warrant any estimates based thereon to be treated with caution. Accordingly, we present a new set of estimates of the historical equity risk premium corresponding to periods of increasing data quality but of decreasing sample size. Relative to bonds (bills), the equity premium has averaged 6.3 per cent (6.8 per cent) per annum over 1958–2005, which is a period of relatively good data quality. Together with other results in the paper, the findings reveal a historical estimate that is substantially less than widely cited historical studies would otherwise indicate. We reconcile prior evidence through documenting a dividend adjustment that has typically been overlooked. We also provide estimates that incorporate an adjustment for imputation credits.
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ItemDividend policy: Reconciling DD with MMHandley, JC (ELSEVIER SCIENCE SA, 2008-02)
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ItemAn Empirical Test of the Pricing of VPO ContractsHandley, JC (SAGE Publications, 2003-01-01)A variable purchase option (VPO) is a call option issued by a company on a stochastic rather than on a fixed number of its ordinary shares. This paper tests the arbitrage-free pricing model of Handley (2000) using a transactions dataset of actual market prices covering the five VPOs traded on the Australian Stock Exchange during the six-year period from May 1992 to May 1998. It is initially found that the model systematically overprices VPOs. A subsequent case-based explanatory analysis of the pricing errors, however, shows that this mispricing substantially disappears under different estimates of two key parameters. The results are consistent with investors using risk-adjusted discount rates rather than the risk-free rate in valuing the bond component of the VPO and, when material, using a narrow range of volatility estimates, rather than historic volatility estimates, in valuing the option component of the VPO.