Primes and scores: Value, volatility, and vehicles for financing.
Item
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Title
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Primes and scores: Value, volatility, and vehicles for financing.
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Identifier
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AAI9304676
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identifier
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9304676
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Creator
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Huckins, Nancy White.
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Contributor
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Adviser: Ashok Vora
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Date
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1992
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Language
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English
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Publisher
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City University of New York.
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Subject
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Business Administration, General | Economics, Finance
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Abstract
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This dissertation is a study of financial innovation: primes and scores. They are covered calls, and European calls, respectively, written from 1985-1987 on twenty-six trusts established by the Americus Shareholder Corporation. Primes and scores frequently sell at a premium to the underlying stock. Two efficiency tests of the market for each trust were performed using three-five years of Friday closing prices obtained from Barrons. The market is efficient although large premiums persist. The results suggest that value additivity does not hold in an imperfect market. To determine the source of the premium, a cross-sectional time series analysis was conducted using OLS. The premium can be attributed to: market completeness, reduction of transactions costs, heterogeneous expectations of investors, and noise trading. The results suggest that financial innovation may be a profitable activity.;The term structure of implied volatility is examined. It is shown that the slope of the term structure of volatility depends on whether the correlation of the returns of the underlying security is positive, negative or zero. The implied volatility of at-the-money scores from the original sample is compared to the implied volatility of at-the-money calls written on the same stock. The Black-Scholes model with a discrete dividend adjustment is used to compute the implied volatilities. The estimates are sensitive to the dividend adjustment. Score volatilities are higher (lower) than call volatilities when a dividend adjustment is (is not) used. Consequently, the slope of the term structure can not be determined. It has previously been shown that the implied volatility of one to nine month options is mean reverting. Estimates of the elasticity of score volatility, given changes in call volatility, are consistently less than one. For the first time, it is shown that the implied standard deviation of long term options is expected to be mean reverting.;Three additional financial innovations: Unbundled Stock Units, Preferred Equity Redemption Cumulative Stock (PERCS), and SuperShares are described and contrasted with primes and scores.
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Type
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dissertation
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Source
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PQT Legacy CUNY.xlsx
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degree
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Ph.D.
