American GARCH employee stock option valuation

Angel Len and Antoni Vaello-Sebasti
Authors registered in the RePEc Author Service: Antoni Vaello-Sebastià, Sr.

Journal of Banking & Finance, 2009, vol. 33, issue 6, 1129-1143

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.

Keywords: Employee; stock; option; GARCH; Least-squares; Monte; Carlo; Fair; value (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:33:y:2009:i:6:p:1129-1143

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