Abstract Employee stock option had been discussed for long time and had become very popular topic for current corporates¡¦ financial management. The importance of its option value model becomes hot topic now. The recommended model based on FASB No. 123 may not be helpful to see its payoff distortion from risk aversion and employee exit rate factors. We choose some companies at Taiwan which use employee stock option as their financial tool and study how both risk aversion and employee exit rate impact their value with modified binomial tree method. The results show that risk aversion factor is more sensitivity and cause option payoff change its value within very narrow input range, while employee exit rate also change option value sigfincantly after 10% exit rate range. Hence. Evaluation of risk aversion and employee exit rate factors become important. Companies need to search for optimal solution of those factors to achieve optimal option valuation and its relative incentive effect in order to retain their employee.

This dissertation contains three essays on risk aversion. In the first essay, we an- alyze comparative risk aversion in a new way, through a comparative statics problem in which, for a cost, agents can shift from an initial probability distribution toward a preferred distribution. The Ross characterization arises when the original distribution is riskier than the preferred distribution and the cost is monetary, and the Arrow-Pratt characterization arises when the original distribution differs from the preferred distribution by a simple mean-preserving spread and the cost is a utility cost. Higher-order increases in risk lead to higher-order generalizations, and the com- parative statics method yields a unified approach to the problem of comparative risk attitudes. In the second essay, we analyze decisions made by a group of terrorists and a government in a zero-sum game in which the terrorists minimize a representative citizen's expected utility and the government maximizes it. The terrorists' strategy balances the probability and the severity of the attack while the government chooses the level of investment reducing the probability and/or mitigating the severity. We find that if the representative citizen is risk neutral, the terrorists' response is not associated with the government's action and the representative citizen's risk attitudes affect the strategies of the government and the terrorists. Risk aversion always in- creases equilibrium severity but does not always increase equilibrium expenditure of the government. In the last essay, we consider a situation in which an individual has to pay for a good before he realizes the state-dependent surplus of the good. This ex-ante willingness to pay is called the option price and the difference between the option price and the expected surplus is the option value. We find that the option value actually is the buying price for a fixed payment of the expected surplus, and there is a special case in which the option value equals the negative of the compensating risk premium. We also find the effects on the option price and the option value when the expected utility assumption is replaced by a rank-dependent expected utility.

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The pricing of total liquidity risk is studied in the cross-section of stock returns. The study suggests that there is a positive relation between total volatility of liquidity and expected returns. Our measure of liquidity is based on Amihud (2002) and its volatility is measured using daily data. Furthermore, we document that total volatility of liquidity is priced in the presence of systematic liquidity risk: the covariance of stock returns with aggregate liquidity, the covariance of stock liquidity with aggregate liquidity, and the covariance of stock liquidity with the market return. The separate pricing of total volatility of liquidity indicates that idiosyncratic liquidity risk is important in the cross section of returns. This result is puzzling in light of Acharya and Pedersen (2005) who develop a model in which only systematic liquidity risk affects returns. The positive correlation between the volatility of liquidity and expected returns suggests that risk averse investors require a risk premium for holding stocks that have high variation in liquidity. Higher variation in liquidity implies that a stock may become illiquid with higher probability at a time when it is traded. This is important for investors who face an immediate liquidity need and are not able to wait for periods of high liquidity to sell.

Second order stochastic dominance is an optimal rule for portfolio selection of risk averse investors when we only know that the investors' utility function is increasing concave. The main advantage of SSD is that it makes no assumptions regarding the return distributions of investment assets and has been proven to lead to utility maximization for the class of increasing concave utility functions. A number of different SSD models have emerged in the literature for portfolio selection based on SSD. However, current SSD models produce the same SSD efficient portfolio for all risk averse investors, regardless of their risk aversion degree. In this thesis, we have developed a new SSD efficiency model, SSD-DP, which unlike existing SSD efficiency models in the literature, provides an SSD efficient portfolio as a function of investors' risk aversion degrees. The SSD-DP model is based on the linear programming technique and finds an SSD efficient portfolio by minimizing the dual power transform (DP) of a weighted portfolio of assets for a given risk aversion degree. We show that the optimal portfolio of the proposed model is SSD efficient, i.e. it is not dominated by SSD by any other portfolio, and, through empirical studies of historical data, we show that the method is a promising tool for constructing trading strategies.

Second order stochastic dominance is an optimal rule for portfolio selection of risk averse investors when we only know that the investors' utility function is increasing concave. The main advantage of SSD is that it makes no assumptions regarding the return distributions of investment assets and has been proven to lead to utility maximization for the class of increasing concave utility functions. A number of different SSD models have emerged in the literature for portfolio selection based on SSD. However, current SSD models produce the same SSD efficient portfolio for all risk averse investors, regardless of their risk aversion degree. In this thesis, we have developed a new SSD efficiency model, SSD-DP, which unlike existing SSD efficiency models in the literature, provides an SSD efficient portfolio as a function of investors' risk aversion degrees. The SSD-DP model is based on the linear programming technique and finds an SSD efficient portfolio by minimizing the dual power transform (DP) of a weighted portfolio of assets for a given risk aversion degree. We show that the optimal portfolio of the proposed model is SSD efficient, i.e. it is not dominated by SSD by any other portfolio, and, through empirical studies of historical data, we show that the method is a promising tool for constructing trading strategies.

Thesis (M.S. in Combat Systems Technology)--Naval Postgraduate School, Dec. 2004. / Thesis advisor(s): Daphne Kapolka. Includes bibliographical references (p. 61). Also available online.

Thesis (Ph. D.)--University of Texas at Austin, 2007. / Vita. Includes bibliographical references.

The purpose of this study was to determine the effects of whether pounds are being lost or gained on the rate at which people discount the value of weight change outcomes, as well as determine the effects of whether pounds are being lost or gained and diet length on the value of access to higher calorie foods relative to weight change outcomes. This was accomplished by repeatedly asking participants to choose between two dietary options of the same length but which resulted in gaining or losing a certain number of pounds. Each question varied the length of the diet, how many pounds could be gained or lost, and whether those pounds were being gained when they chose the higher calorie diet or lost when they chose the lower calorie diet. The survey was administered with 30 participants. Whether pounds per being gained or lost did not have a significant effect on the rate at which weight change outcomes were discounted (t = 1.883, p = .07), but did have a significant effect on how many pounds needed to be at stake per day in order for the participant to choose the lower calorie diet (t = 4.995, p < .01). There was also a significant correlation between diet length and how many pounds needed to be at stake per day in order for the participant to choose the lower calorie diet (ρ = -.373, p <.01). The current investigation has implications for our understanding of choice and discounting behavior, and has specific implications for people who wish to make healthier dietary decisions.

My dissertation consists of three essays. The central theme of these essays is the psychological factors and biases that affect the portfolio allocation decision. The first essay entitled, “Are women more risk-averse than men?” examines the gender difference in risk aversion as revealed by actual investment choices. Using a sample that controls for biases in the level of education and finance knowledge, there is evidence that when individuals have the same level of education, irrespective of their knowledge of finance, women are no more risk-averse than their male counterparts. However, the gender-risk aversion relation is also a function of age, income, wealth, marital status, race/ethnicity and the number of children in the household. The second essay entitled, “Can diversification be learned?” investigates if investors who have superior investment knowledge are more likely to actively seek diversification benefits and are less prone to allocation biases. Results of cross-sectional analyses suggest that knowledge of finance increases the likelihood that an investor will efficiently allocate his direct investments across the major asset classes; invest in foreign assets; and hold a diversified equity portfolio. However, there is no evidence that investors who are more financially sophisticated make superior allocation decisions in their retirement savings. The final essay entitled, “The demographics of non-participation”, examines the factors that affect the decision not to hold stocks. The results of probit regression models indicate that when individuals are highly educated, the decision to not participate in the stock market is less related to demographic factors. In particular, when individuals have attained at least a college degree and have advanced knowledge of finance, they are significantly more likely to invest in equities either directly or indirectly through mutual funds or their retirement savings. There is also evidence that the decision not to hold stocks is motivated by short-term market expectations and the most recent investment experience. The findings of these essays should increase the body of research that seeks to reconcile what investors actually do (positive theory) with what traditional theories of finance predict that investors should do (normative theory).