The Liquid Yield Option Note (LYON), created by Merrill Lynch, is a highly successful financial i... more The Liquid Yield Option Note (LYON), created by Merrill Lynch, is a highly successful financial innovation. LYON is a zero-coupon, callab le, putable and convertible bond. None of the features of a LYON is new. It is their combination which appeals to investors and issuers. The McConnell and Schwartz (1986) model was the first to address the issue of pricing LYONs. Besides other assumptions, the model assumes that the LYON can be converted into common stock unconditionally, and no interest is paid on these bonds. However, for many LYONs trading today, their convertibility into common stock is conditional upon the issuer's stock price crossing certain prescribed thresholds during certain periods of time. Also, many LYONs pay interest, contingent upon the price of the LYON again crossing certain prescribed thresholds. The McConnell and Schwartz (1986) pricing model does not address these issues. We ext end the original model to take into account the issues of conditional convertib...
ABSTRACT We argue that the addition of a stock to the S&P 500 index leads to an increase ... more ABSTRACT We argue that the addition of a stock to the S&P 500 index leads to an increase in the volume of liquidity-motivated trading in the stock by index investors. This, in turn, lowers the cost of supplying liquidity and generates abnormal returns. Consistent with this argument, we document a permanent increase in the liquidity of stocks added to the S&P 500 index. Specifically, the median quoted and effective spreads decrease and the median quoted depth, trading volume and trade frequencies increase over three months following listing. The improvement in liquidity is due primarily to a decrease in the median direct cost of transacting and a smaller decline in the median asymmetric information cost of transacting. Further, we find that the event period cumulative abnormal returns are strongly associated with the decrease in the direct cost of transacting. These findings provide strong support for a liquidity-based explanation for the observed wealth effect due to S&P 500 listing.
The Liquid Yield Option Note (LYON), created by Merrill Lynch, is a highly successful financial i... more The Liquid Yield Option Note (LYON), created by Merrill Lynch, is a highly successful financial innovation. LYON is a zero-coupon, callab le, putable and convertible bond. None of the features of a LYON is new. It is their combination which appeals to investors and issuers. The McConnell and Schwartz (1986) model was the first to address the issue of pricing LYONs. Besides other assumptions, the model assumes that the LYON can be converted into common stock unconditionally, and no interest is paid on these bonds. However, for many LYONs trading today, their convertibility into common stock is conditional upon the issuer's stock price crossing certain prescribed thresholds during certain periods of time. Also, many LYONs pay interest, contingent upon the price of the LYON again crossing certain prescribed thresholds. The McConnell and Schwartz (1986) pricing model does not address these issues. We ext end the original model to take into account the issues of conditional convertib...
The Liquid Yield Option Note (LYON), created by Merrill Lynch, is a highly successful financial i... more The Liquid Yield Option Note (LYON), created by Merrill Lynch, is a highly successful financial innovation. LYON is a zero-coupon, callab le, putable and convertible bond. None of the features of a LYON is new. It is their combination which appeals to investors and issuers. The McConnell and Schwartz (1986) model was the first to address the issue of pricing LYONs. Besides other assumptions, the model assumes that the LYON can be converted into common stock unconditionally, and no interest is paid on these bonds. However, for many LYONs trading today, their convertibility into common stock is conditional upon the issuer's stock price crossing certain prescribed thresholds during certain periods of time. Also, many LYONs pay interest, contingent upon the price of the LYON again crossing certain prescribed thresholds. The McConnell and Schwartz (1986) pricing model does not address these issues. We ext end the original model to take into account the issues of conditional convertib...
ABSTRACT We argue that the addition of a stock to the S&P 500 index leads to an increase ... more ABSTRACT We argue that the addition of a stock to the S&P 500 index leads to an increase in the volume of liquidity-motivated trading in the stock by index investors. This, in turn, lowers the cost of supplying liquidity and generates abnormal returns. Consistent with this argument, we document a permanent increase in the liquidity of stocks added to the S&P 500 index. Specifically, the median quoted and effective spreads decrease and the median quoted depth, trading volume and trade frequencies increase over three months following listing. The improvement in liquidity is due primarily to a decrease in the median direct cost of transacting and a smaller decline in the median asymmetric information cost of transacting. Further, we find that the event period cumulative abnormal returns are strongly associated with the decrease in the direct cost of transacting. These findings provide strong support for a liquidity-based explanation for the observed wealth effect due to S&P 500 listing.
The Liquid Yield Option Note (LYON), created by Merrill Lynch, is a highly successful financial i... more The Liquid Yield Option Note (LYON), created by Merrill Lynch, is a highly successful financial innovation. LYON is a zero-coupon, callab le, putable and convertible bond. None of the features of a LYON is new. It is their combination which appeals to investors and issuers. The McConnell and Schwartz (1986) model was the first to address the issue of pricing LYONs. Besides other assumptions, the model assumes that the LYON can be converted into common stock unconditionally, and no interest is paid on these bonds. However, for many LYONs trading today, their convertibility into common stock is conditional upon the issuer's stock price crossing certain prescribed thresholds during certain periods of time. Also, many LYONs pay interest, contingent upon the price of the LYON again crossing certain prescribed thresholds. The McConnell and Schwartz (1986) pricing model does not address these issues. We ext end the original model to take into account the issues of conditional convertib...
Uploads
Papers by Shantaram Hegde