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Papers by Mark Shackleton

Research paper thumbnail of NAV Inflation and Impact on Performance in China

European Financial Management

Research paper thumbnail of The simplest American and Real Option approximations: Geske-Johnson interpolation in maturity and yield

Applied Economics Letters, 2003

Research paper thumbnail of CAPM, Higher Cohmoment and Factor Models of UK Stock Returns

J Bus Finan Account, 2004

Research paper thumbnail of Continuous Workout Mortgages, Refinancing and Prepayments

ABSTRACT We model Continuous Workout Mortgages (CWMs) in an economic environment with refinancing... more ABSTRACT We model Continuous Workout Mortgages (CWMs) in an economic environment with refinancings and prepayments by employing a market-observable variable such as the house price index. Our main results include: (a) explicit modelling of repayment and interest-only CWMs; (b) closed form formulae for mortgage payment and mortgage balance of a repayment CWM; (c) a closed form formula for the actuarially fair mortgage rate of an interest-only CWM. For repayment CWMs we extend our analysis to include two negotiable parameters: adjustable \"workout proportion\" and adjustable \"workout threshold.\" These results are of importance as they not only help understanding the mechanics of CWMs and estimating key contract parameters. Our results also provide guidance on how to mitigate systemic risk.

Research paper thumbnail of Pricing Options with American Style Average Reset Features

This study extends the Hull and White (1993 J. Derivatives 1 21-31) binomial method to construct ... more This study extends the Hull and White (1993 J. Derivatives 1 21-31) binomial method to construct a trinomial model for the valuation of American-style options whose strike price can be reset to a new level. The reset criterion is conditioned upon the average underlying asset price hitting the reset barrier in a specified period although the model proposed can accommodate

Research paper thumbnail of Economic hysteresis effects and hitting time densities for CIR diffusions

Page 1. Economic Hysteresis Effects and Hitting Time Densities for CIR Diffusions José Carlos Dia... more Page 1. Economic Hysteresis Effects and Hitting Time Densities for CIR Diffusions José Carlos Dias and Mark B. Shackleton∗ Abstract Using the so-called mean-reverting square-root process of Cox et al. (1985b) we generalize ...

Research paper thumbnail of A snakes and ladders representation of stock prices and returns

The Mathematical Gazette, 2011

Snakes and ladders is an ancient Indian game of chance that offers amusement as well as a metapho... more Snakes and ladders is an ancient Indian game of chance that offers amusement as well as a metaphor for life's many ups and downs. Games offer useful and fun ways of conveying ideas as well as solution techniques and this game has considerable mathematical tractability. This note shows how snakes and ladders can be used to represent the ups and downs of share ownership and determine fair values of a multistage project that pays fixed dividends at uncertain completion times and has random returns

Research paper thumbnail of Valuing participation mortgage loans using profit caps and floors

Research paper thumbnail of Durable vs. disposable equipment choice under interest rate uncertainty

Http Dx Doi Org 10 1080 13518470802560790, Feb 5, 2009

This article analyzes present value costs under stochastic interest rates and investigates the ef... more This article analyzes present value costs under stochastic interest rates and investigates the effect of interest rate uncertainty on the replacement investment decision that a firm must make when a piece of equipment becomes obsolete and needs replacement with either short- or long-lived equipment. We consider the replacement problem under stochastic interest rates in a CIR economy (Cox, Ingersoll, and

Research paper thumbnail of Foreign Exchange Implied. Variance and the Forward Premium Puzzle

Research paper thumbnail of The Expected Return and Exercise Time of Merton-style Real Options

Journal of Business Finance and Accounting Jbfa, Apr 1, 2002

We analyse the rate of return and expected exercise time of Merton-style options (1973) employed ... more We analyse the rate of return and expected exercise time of Merton-style options (1973) employed in many real option situations where the possibility of exercise is both perpetual and American in nature. Using risk-neutral and risk-adjusted pricing techniques, Merton-style options are shown to have an expected return that is a "constant percentage" of the option value and independent of the

Research paper thumbnail of A non-parametric spectral test of serial correlation

Research paper thumbnail of Hysteresis effects under stochastic interest rates

Research paper thumbnail of Entry, Exit and Activation Probability in a Two-Player Real Options Game

Ssrn Electronic Journal, 2002

Research paper thumbnail of An empirical investigation of option returns: overpricing and the role of higher systematic moments

Research paper thumbnail of On the expected payoff and true probability of exercise of European options

Http Dx Doi Org 10 1080 135048501750104079, Oct 6, 2010

The continuous-time formula for expected payoff to holding an option, which nests several major p... more The continuous-time formula for expected payoff to holding an option, which nests several major pricing tools, is derived. It is shown also that under current market conditions the true exercise probability, N (d4), lies halfway between the two more familiar terms: N (d1) and N (d2).

Research paper thumbnail of Participating Mortgages and the Eciency of Financial Intermediation

Research paper thumbnail of Valuing a …rm's capital structure using pro…t caps, ‡oors and bond default options

Abstract Despite many past papers concerning a …rm’s capital structure, the valuation of debt and... more Abstract Despite many past papers concerning a …rm’s capital structure, the valuation of debt and equity and cost of capital, there are few that explicitly codify contingent sharing rules for the …rm’s cash‡ow over time. We motivate equity and debt valuation by modeling,tax and distress costs using cap and ‡oor technology as well as a default option at maturity. This approach,sheds light on theoretical valuation issues, optimal capital structure choice as well as a …rm’s component costs of capital. JEL: G13, G33, G35. 1,Introduction The capital structure of …rms has been studied for at least …fty years (since

Research paper thumbnail of Flow options: Continuous real caps and 掳oors

Research paper thumbnail of Reversible, Flow Options

Reversible, Flow Options. In this paper we produce a formula for a Þnitely lived, perfectly rever... more Reversible, Flow Options. In this paper we produce a formula for a Þnitely lived, perfectly reversible option on a ßow. For this real option that allows frequent and costless switch-ing between the maximum of two asset ßows, we Þrst examine the perpetual and then the Þnite cases in terms of switching thresholds and values. The Þnite option value is inferred from the perpetual using an annuity argu-ment. Applications include energy and commodity consumption costs where switching between ßows can occur frequently and costlessly.

Research paper thumbnail of NAV Inflation and Impact on Performance in China

European Financial Management

Research paper thumbnail of The simplest American and Real Option approximations: Geske-Johnson interpolation in maturity and yield

Applied Economics Letters, 2003

Research paper thumbnail of CAPM, Higher Cohmoment and Factor Models of UK Stock Returns

J Bus Finan Account, 2004

Research paper thumbnail of Continuous Workout Mortgages, Refinancing and Prepayments

ABSTRACT We model Continuous Workout Mortgages (CWMs) in an economic environment with refinancing... more ABSTRACT We model Continuous Workout Mortgages (CWMs) in an economic environment with refinancings and prepayments by employing a market-observable variable such as the house price index. Our main results include: (a) explicit modelling of repayment and interest-only CWMs; (b) closed form formulae for mortgage payment and mortgage balance of a repayment CWM; (c) a closed form formula for the actuarially fair mortgage rate of an interest-only CWM. For repayment CWMs we extend our analysis to include two negotiable parameters: adjustable \"workout proportion\" and adjustable \"workout threshold.\" These results are of importance as they not only help understanding the mechanics of CWMs and estimating key contract parameters. Our results also provide guidance on how to mitigate systemic risk.

Research paper thumbnail of Pricing Options with American Style Average Reset Features

This study extends the Hull and White (1993 J. Derivatives 1 21-31) binomial method to construct ... more This study extends the Hull and White (1993 J. Derivatives 1 21-31) binomial method to construct a trinomial model for the valuation of American-style options whose strike price can be reset to a new level. The reset criterion is conditioned upon the average underlying asset price hitting the reset barrier in a specified period although the model proposed can accommodate

Research paper thumbnail of Economic hysteresis effects and hitting time densities for CIR diffusions

Page 1. Economic Hysteresis Effects and Hitting Time Densities for CIR Diffusions José Carlos Dia... more Page 1. Economic Hysteresis Effects and Hitting Time Densities for CIR Diffusions José Carlos Dias and Mark B. Shackleton∗ Abstract Using the so-called mean-reverting square-root process of Cox et al. (1985b) we generalize ...

Research paper thumbnail of A snakes and ladders representation of stock prices and returns

The Mathematical Gazette, 2011

Snakes and ladders is an ancient Indian game of chance that offers amusement as well as a metapho... more Snakes and ladders is an ancient Indian game of chance that offers amusement as well as a metaphor for life's many ups and downs. Games offer useful and fun ways of conveying ideas as well as solution techniques and this game has considerable mathematical tractability. This note shows how snakes and ladders can be used to represent the ups and downs of share ownership and determine fair values of a multistage project that pays fixed dividends at uncertain completion times and has random returns

Research paper thumbnail of Valuing participation mortgage loans using profit caps and floors

Research paper thumbnail of Durable vs. disposable equipment choice under interest rate uncertainty

Http Dx Doi Org 10 1080 13518470802560790, Feb 5, 2009

This article analyzes present value costs under stochastic interest rates and investigates the ef... more This article analyzes present value costs under stochastic interest rates and investigates the effect of interest rate uncertainty on the replacement investment decision that a firm must make when a piece of equipment becomes obsolete and needs replacement with either short- or long-lived equipment. We consider the replacement problem under stochastic interest rates in a CIR economy (Cox, Ingersoll, and

Research paper thumbnail of Foreign Exchange Implied. Variance and the Forward Premium Puzzle

Research paper thumbnail of The Expected Return and Exercise Time of Merton-style Real Options

Journal of Business Finance and Accounting Jbfa, Apr 1, 2002

We analyse the rate of return and expected exercise time of Merton-style options (1973) employed ... more We analyse the rate of return and expected exercise time of Merton-style options (1973) employed in many real option situations where the possibility of exercise is both perpetual and American in nature. Using risk-neutral and risk-adjusted pricing techniques, Merton-style options are shown to have an expected return that is a "constant percentage" of the option value and independent of the

Research paper thumbnail of A non-parametric spectral test of serial correlation

Research paper thumbnail of Hysteresis effects under stochastic interest rates

Research paper thumbnail of Entry, Exit and Activation Probability in a Two-Player Real Options Game

Ssrn Electronic Journal, 2002

Research paper thumbnail of An empirical investigation of option returns: overpricing and the role of higher systematic moments

Research paper thumbnail of On the expected payoff and true probability of exercise of European options

Http Dx Doi Org 10 1080 135048501750104079, Oct 6, 2010

The continuous-time formula for expected payoff to holding an option, which nests several major p... more The continuous-time formula for expected payoff to holding an option, which nests several major pricing tools, is derived. It is shown also that under current market conditions the true exercise probability, N (d4), lies halfway between the two more familiar terms: N (d1) and N (d2).

Research paper thumbnail of Participating Mortgages and the Eciency of Financial Intermediation

Research paper thumbnail of Valuing a …rm's capital structure using pro…t caps, ‡oors and bond default options

Abstract Despite many past papers concerning a …rm’s capital structure, the valuation of debt and... more Abstract Despite many past papers concerning a …rm’s capital structure, the valuation of debt and equity and cost of capital, there are few that explicitly codify contingent sharing rules for the …rm’s cash‡ow over time. We motivate equity and debt valuation by modeling,tax and distress costs using cap and ‡oor technology as well as a default option at maturity. This approach,sheds light on theoretical valuation issues, optimal capital structure choice as well as a …rm’s component costs of capital. JEL: G13, G33, G35. 1,Introduction The capital structure of …rms has been studied for at least …fty years (since

Research paper thumbnail of Flow options: Continuous real caps and 掳oors

Research paper thumbnail of Reversible, Flow Options

Reversible, Flow Options. In this paper we produce a formula for a Þnitely lived, perfectly rever... more Reversible, Flow Options. In this paper we produce a formula for a Þnitely lived, perfectly reversible option on a ßow. For this real option that allows frequent and costless switch-ing between the maximum of two asset ßows, we Þrst examine the perpetual and then the Þnite cases in terms of switching thresholds and values. The Þnite option value is inferred from the perpetual using an annuity argu-ment. Applications include energy and commodity consumption costs where switching between ßows can occur frequently and costlessly.