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)
ItemRe-examination of the historical equity risk premium in AustraliaBrailsford, T ; Handley, JC ; Maheswaran, K (BLACKWELL PUBLISHING, 2008-03-01)
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.