Non-transferable non-hedgeable executive stock option pricing
To value non-transferable non-hedgeable (NTNH) contingent claims and price executive stock options (ESOs), we use a replication argument to translate portfolios with NTNH derivatives into portfolios of primary assets (only) with stochastic portfolio constraints. By identifying stochastic discount fa...
| Main Authors: | , , |
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| Format: | Journal Article |
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Elsevier
2015
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| Online Access: | http://www.sciencedirect.com/science/article/pii/S0165188915000214 http://hdl.handle.net/20.500.11937/25674 |
| _version_ | 1848751774338383872 |
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| author | Colwell, D. Feldman, D. Hu, Wei |
| author_facet | Colwell, D. Feldman, D. Hu, Wei |
| author_sort | Colwell, D. |
| building | Curtin Institutional Repository |
| collection | Online Access |
| description | To value non-transferable non-hedgeable (NTNH) contingent claims and price executive stock options (ESOs), we use a replication argument to translate portfolios with NTNH derivatives into portfolios of primary assets (only) with stochastic portfolio constraints. By identifying stochastic discount factors and finding subjective prices of NTNH European and American ESOs, for block and continuous partial exercise, we derive executives' optimal exercise policies, and use these to find objective prices/costs of ESOs to firms. Through numerical simulations, we obtain policy implications regarding ESOs' incentivizing efficiency. For the first time, we demonstrate that, unlike under block exercise, subjective prices under continuous partial exercise may be higher than objective ones. Moreover, volatility regimes and executives' "other wealth" are important in ESO pricing, and are thus essential to empirical executive compensation studies. |
| first_indexed | 2025-11-14T07:58:04Z |
| format | Journal Article |
| id | curtin-20.500.11937-25674 |
| institution | Curtin University Malaysia |
| institution_category | Local University |
| last_indexed | 2025-11-14T07:58:04Z |
| publishDate | 2015 |
| publisher | Elsevier |
| recordtype | eprints |
| repository_type | Digital Repository |
| spelling | curtin-20.500.11937-256742017-01-30T12:49:38Z Non-transferable non-hedgeable executive stock option pricing Colwell, D. Feldman, D. Hu, Wei Non-transferable Executive stock options Constrained portfolio optimization Stochastic discount factor Non-hedgeable To value non-transferable non-hedgeable (NTNH) contingent claims and price executive stock options (ESOs), we use a replication argument to translate portfolios with NTNH derivatives into portfolios of primary assets (only) with stochastic portfolio constraints. By identifying stochastic discount factors and finding subjective prices of NTNH European and American ESOs, for block and continuous partial exercise, we derive executives' optimal exercise policies, and use these to find objective prices/costs of ESOs to firms. Through numerical simulations, we obtain policy implications regarding ESOs' incentivizing efficiency. For the first time, we demonstrate that, unlike under block exercise, subjective prices under continuous partial exercise may be higher than objective ones. Moreover, volatility regimes and executives' "other wealth" are important in ESO pricing, and are thus essential to empirical executive compensation studies. 2015 Journal Article http://hdl.handle.net/20.500.11937/25674 http://www.sciencedirect.com/science/article/pii/S0165188915000214 Elsevier restricted |
| spellingShingle | Non-transferable Executive stock options Constrained portfolio optimization Stochastic discount factor Non-hedgeable Colwell, D. Feldman, D. Hu, Wei Non-transferable non-hedgeable executive stock option pricing |
| title | Non-transferable non-hedgeable executive stock option pricing |
| title_full | Non-transferable non-hedgeable executive stock option pricing |
| title_fullStr | Non-transferable non-hedgeable executive stock option pricing |
| title_full_unstemmed | Non-transferable non-hedgeable executive stock option pricing |
| title_short | Non-transferable non-hedgeable executive stock option pricing |
| title_sort | non-transferable non-hedgeable executive stock option pricing |
| topic | Non-transferable Executive stock options Constrained portfolio optimization Stochastic discount factor Non-hedgeable |
| url | http://www.sciencedirect.com/science/article/pii/S0165188915000214 http://hdl.handle.net/20.500.11937/25674 |