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THE VALUATION OF EXECUTIVE STOCK OPTIONS UNDER GARCH MODELS

Published online by Cambridge University Press:  11 August 2017

Xingchun Wang ,
Zhiwei Su  and
Guangli Xu
Xingchun Wang
Affiliation:
School of International Trade and Economics, University of International Business and Economics, Beijing 100029, China E-mail: xchwangnk@aliyun.com
Zhiwei Su
Affiliation:
PBC School of Finance, Tsinghua University, Beijing 100083, China E-mail: zhiweisu@foxmail.com
Guangli Xu
Affiliation:
School of Statistics, University of International Business and Economics, Beijing 100029, China E-mail: xuguangli@uibe.edu.cn
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Abstract

In this paper, we investigate executive stock options with endogenous departure and time-varying variances. We use a “Generalized Autoregressive Conditional Heteroskedasticity” process to capture the variance process of the log stock price. In addition, we take into consideration the departure risk of the executive and assume that the probability of remaining employed has a power form of stock price ratios. After deriving the closed-form pricing formulae of executive stock options, we illustrate the effects of the departure risk on the values of executive stock options.

Keywords

departure riskendogenous departureexecutive stock optionsGARCH models
Type
Research Article
Information
Probability in the Engineering and Informational Sciences , Volume 32 , Issue 3 , July 2018 , pp. 409 - 433
Copyright
Copyright © Cambridge University Press 2017 

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