No abstract

No abstract

The purpose of this paper is to understand the institutional features of Chapter 11 from an empirical examination of thirty firms that have emerged from reorganization. We find the recontracting framework of Chapter 11 to be complex, lengthy, and costly. Violations of absolute priority in favor of stockholders are frequently encountered. These deviations may result from the bargaining process of Chapter 11 or from a recontracting process between creditors and stockholders which recognizes the ability of stockholder‐oriented management to preserve firm value. An example of such recontracting addresses Myers' underinvestment problem. An investigation of the effects of Chapter 11 on the pricing of risky debt is also provided.

No abstract

This paper puts forward a valuation framework for mortgage‐backed securities. Rather than imposing an optimal, value‐minimizing call condition, we assume that at each point in time there exists a probability of prepaying; this conditional probability depends upon the prevailing state of the economy. To implement our valuation procedure, we use maximum‐likelihood techniques to estimate a prepayment function in light of recent aggregate GNMA prepayment experience. By integrating this empirical prepayment function into our valuation framework, we provide a complete model to value mortgage‐backed securities.

The Black-Scholes call option pricing model exhibits systematic empirical biases. The Merton call option pricing model, which explicitly admits jumps in the underlying security return process, may potentially eliminate these biases. We provide statistical evidence consistent with the existence of lognormally distributed jumps in a majority of the daily returns of a sample of NYSE listed common stocks. However, we find no operationally significant differences between the Black-Scholes and Merton model prices of the call options written on the sampled common stocks. EMPIRICAL EVIDENCE CONFIRMS THE systematic mispricing of theBlack-Scholes call option pricing model. These biases have been documented with respect to the call option's exercise price, its time to expiration, and the underlying common stock's volatility. Black [3] reports that the model overprices deep in-the-money options, while it underprices deep out-of-the-money options. By contrast, MacBeth and Merville [10] state that deep in-the-money options have model prices that are lower than market prices, whereas deep out-of-the-money options have model prices that are higher. These conflicting results may perhaps be reconciled by the fact that the studies examined market prices at different points in time and these systematic biases vary with time (Rubinstein [16 ]). Employing over-the-counter data, Black and Scholes [4] also document that the model underprices both calls written on low volatility stocks and calls near to expiration, while the model overprices calls written on high volatility stocks.A number of explanations for the systematic price bias have been suggested (Geske and Roll [6]). Among these is the fact that the Black-Scholes assumption of a lognormally distributed security price fails to systematically capture important characteristics of the actual security price process. Merton [11, 12] has put forward an option pricing model that explicitly admits jumps in the underlying security return process, and which may resolve these pricing discrepancies. According to the Merton specification, the arrival of normal information leads to price changes which can be modelled as a lognormal diffusion, while the arrival of abnormal information, which can be modelled as a Poisson process, gives rise * Both authors from the Graduate School of Business Administration, The University of Michigan. We thank Phelim Boyle, Robert Jarrow, Eric Kirzner, William Margarabe, Robert Merton, and Stuart Turnbull for helpful suggestions. Michael Jenkins, David Sauer, and Michael Weisbach provided excellent research assistance. The comments of an anonymous referee are gratefully acknowledged. This work was supported by summer research grants from the Graduate School of Business Administration at The University of Michigan. Any remaining errors are the authors' responsibility. 155 156 The Journal of Finance to lognormally distributed jumps in the security return. If the underlying security return follows the Poisson jump-diffusion process, then the resultant equilibrium c...

his article uses data from the London gold market to investigate the nature, T frequency, and causes of rounding in transactions prices. The degree of price resolution-whether prices are quoted to the nearest 5, 10, 25, 50, or 100 centsis not constant, but rather is a function of the amount of information in the market, and the level and variability of the price. This article, therefore, provides further insight into the determination of prices in competitive markets.The fact that transactions actually occur at eighths (stocks) or twentieths (gold), rather than at some nth place decimal, is important from the point of view of the microeconomics of price formation. Economic theory has made much of the optimality of equilibrium prices. However, as Goldman and Beja (1979) point out, economic theory is less informative with regard to the effect of institutional arrangements on the actual functioning of markets. This article addresses one such aspect of a market's microstructure. The implications of the results are that (1) all returns are measured with error and that therefore all empirical work is subject toWe would like to thank

No abstract