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American GARCH employee stock option valuation

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Author Info

  • Len, Angel
  • Vaello-Sebasti, Antoni

Abstract

We implement a flexible simulation-based approach for the fair value of employee stock option (ESO) that accounts for the vesting period, departure risk and voluntary suboptimal early exercise. We introduce GARCH effects on the underlying asset and we analyze the price bias with respect to the constant volatility case. We also perform a sensitivity analysis with respect to changes in several ESO characteristics. We compare this valuation with FAS 123 method revealing a FAS overvaluation. Finally, we value a real ESO plan providing the confidence intervals for the estimated ESO prices.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 33 (2009)
Issue (Month): 6 (June)
Pages: 1129-1143

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Handle: RePEc:eee:jbfina:v:33:y:2009:i:6:p:1129-1143

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Web page: http://www.elsevier.com/locate/jbf

Related research

Keywords: Employee stock option GARCH Least-squares Monte Carlo Fair value;

References

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Citations

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Cited by:
  1. Carmona, Julio & León, Angel & Vaello-Sebastiá, Antoni, 2011. "Does Stock Return Predictability Affect ESO Fair Value?," QM&ET Working Papers 11-2, Universidad de Alicante, Departamento de Métodos Cuantitativos y Teoría Económica, revised 16 Jan 2012.
  2. Chung, San-Lin & Shih, Pai-Ta, 2009. "Static hedging and pricing American options," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 2140-2149, November.
  3. Abudy, Menachem & Benninga, Simon, 2013. "Non-marketability and the value of employee stock options," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5500-5510.
  4. Chung, San-Lin & Hung, Mao-Wei & Wang, Jr-Yan, 2010. "Tight bounds on American option prices," Journal of Banking & Finance, Elsevier, vol. 34(1), pages 77-89, January.

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