Early option exercise: Never say never

• 成果类型: Article
• 署名作者: Jensen, Mads Vestergaard; Pedersen, Lasse Heje
• 署名单位: Copenhagen Business School; New York University; Centre for Economic Policy Research - UK
• 刊物名称: JOURNAL OF FINANCIAL ECONOMICS
• ISSN/ISSBN: 0304-405X
• DOI: 10.1016/j.jfineco.2016.05.008
• 发表日期: 2016
• 页码: 278-299
• 关键词: Option exercise; frictions; Short-sale costs; transaction costs; convertible bonds

摘要

A classic result by Merton (1973) is that, except just before expiration or dividend payments, one should never exercise a call option and never convert a convertible bond. We show theoretically that this result is overturned when investors face frictions. Early option exercise can be optimal when it reduces short-sale costs, transaction costs, or funding costs. We provide consistent empirical evidence, documenting billions of dollars of early exercise for options and convertible bonds using unique data on actual exercise decisions and frictions. Our model can explain as much as 98% of early exercises by market makers and 67% by customers. (C) 2016 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/).