Vol. 22, No. 4, 2024 Dilip B. Madan and King Wang Machines are trained to trade stocks by developing an investment policy for stock investment in a Markovian context. Importantly, the investment actions impact just the immediate reward and not the state transitions. The policies are designed to maximize a nonlinear expectation of the undiscounted… Read more
the JOIM
Hedging Barrier Options Using Reinforcement Learning
Vol. 22, No. 4, 2024 Jacky Chen, Yu Fu, John Hull, Zissis Poulos, Zeyu Wang and Jun Yuan We examine the use of reinforcement learning (RL) to hedge barrier options. We find that, when the hedger’s objective is to minimize value at risk or conditional value at risk, RL is an attractive alternative to traditional… Read more
Black–Merton–Scholes Option Pricing: A 50-Year Celebration—Looking Ahead
Vol. 22, No. 4, 2024 George M. Constantinides It is a great honor to be invited to participate and contribute to the 50-year celebration of the path breaking option pricing theory of Fischer Black, Robert Merton, and Myron Scholes (Black and Scholes (1973) and Merton (1973)). My focus is on financial intermediation and looking ahead… Read more
Keynote Address by Nobel Laureate Myron S. Scholes Fall 2023 UMass Amherst CISDM Conference on: Black–Merton–Scholes Option Pricing: A 50-year Celebration and Looking Ahead
Vol. 22, No. 4, 2024 Myron S. Scholes View PDF… Read more
Introduction
Vol. 22, No. 4, 2024 Douglas Breeden, John Hull and Sanjay Nawalkha We are delighted to present the second special issue of the Journal of Investment Management, commemorating the 50th anniversary of the revolutionary Black-Merton-Scholes (BMS) option pricing model. This edition builds upon the themes of our first special issue, which featured Robert Merton’s keynote… Read more
Book Review – The Puzzle of Sustainable Investment: What Smart Investors Should Know
Vol. 22, No. 3, 2024 by Mark Kritzman (Reviewed by Yaoyun Zhang) View PDF… Read more
Forecasting the Distribution of Option Returns
Vol. 22, No. 3, 2024 Leandro Gomes, Roni Israelov and Bryan Kelly We propose a method for constructing conditional option return distributions. In our model, uncertainty about the future option return has two sources: Changes in the position and shape of the implied volatility surface that shift option values (holding moneyness and maturity fixed), and… Read more
The Options-Inferred Equity Premium and the Slippery Slope of the Negative Correlation Condition
Vol. 22, No. 3, 2024 Gurdip Bakshi, John Crosby, Xiaohui Gao, Jinming Xue and Wei Zhou The negative correlation condition (NCC) of Martin (2017) is that covPt (MT RT,RT )≤ 0 for all MT, where MT is the SDF and RT is the gross market return. He employs this assumption to derive a lower bound… Read more
Stock Market Insurance Prices, BL Skew, Conditional Marginal Utilities and the Equity Risk Premium
Vol. 22, No. 3, 2024 Douglas T. Breeden Option prices contain information about implicit state prices. In their recent article, Breeden and Litzenberger (B-L, 2022) demonstrated how option pricesin bond marketsfrom interest rate cap and floor price data can be used to identify the impacts of central bank policies on the distribution of state prices… Read more
Equivalent Expectation Measures for Risk and Return Analysis of Contingent Claims
Vol. 22, No. 3, 2024 Sanjay K. Nawalkha and Xiaoyang Zhuo Nearly half-a-century after the advent of equivalent martingale measures (EMMs), Nawalkha and Zhuo (2022, 2023) generalize these measures to obtain equivalent expectation measures (EEMs) for analyzing risk and return of portfolios of contingent claims over a finite horizon date. The new measures allow the… Read more