Area of Expertise
- Derivative Securities
- Employee Stock Options
- Executive Compensation
- Financial Engineering
- Fixed Income
My primary research interest is in the area of option pricing, volatility estimation, capital market efficiency, and executive compensation. In particular, I am interested in developing numerical methods for the valuation of complex derivative securities, estimating and forecasting volatility for the valuation of traded and non-traded options, empirically testing capital market efficiency, examining the incentive effects of equity based managerial compensation, and investigating the effectiveness of corporate board of directors in monitoring managerial decisions and its impact on firm performance.
2009-2010, 2006-2007, 2000-2001, and 1999-2000 Merit Award for excellence in teaching, research and service, Schulich School of Business, York University.
2005-2007, and 1999-2000 Schulich Research Fellowship Award
2003 Barclays Global Investors Research Award for paper Incentive Fees, Valuation and Performance of Labor Sponsored Investment Funds, with Scott Andersen.
2001 Conference Best Paper Award at the 2001 annual meeting of the Northern Finance Association, Halifax, NS, for paper entitled “Optimal Contract, Incentive Effects and the Valuation of Executive Stock Options.”
Tian, Y. (2020), "Enhancing Managerial Equity Incentives with Moving Average Payoffs", Journal of Futures Markets, 40(10), 1562-1583.Keywords
Prior research suggests that Asian stock options provide stronger managerial equity incentives than traditional stock options do, holding the cost of the option grant constant. Although this is true on the grant date, it is not over the life of the option grant. Very little of the initial advantage remains after two years because Asian stock options have diminishing incentive effects over time. A simple solution is to replace averaging over the option’s life with averaging over a moving window. We show that moving average options do not have the diminishing incentive problem and are effective in preventing managerial gaming.
Feng, Y., Song, K. and Tian, Y. (2019), "Director Networks, Institutional Investors, and Initial Public Offerings", Journal of Banking and Finance, 106, 246-264.Keywords
We investigate how director networks impact IPO characteristics and find that firms with better-connected directors have higher IPO market valuation, more positive offer price revisions, higher first-day returns, more pre-IPO media coverage, and superior post-IPO stock performance. Director networks are beneficial to the share offering because corporate directors help facilitate information exchange with prospective investors, attract their attention to the IPO, and maintain and grow their interest after the IPO.
Tian, Y. (2017), "Managerial Gaming of Stock and Option Grants", Financial Markets, Institutions and Instruments, 26(3), 127-152.Keywords
In this paper, we examine managerial gaming of different types of equity grants, both at the initial award of the equity grants (front‐end gaming) and the unwinding of the equity holdings in the future (back‐end gaming). We find that the potential gains from stock price manipulation vary substantially across different types of equity grants. While traditional stock option grants are less vulnerable to front‐end gaming, they are more vulnerable to back‐end gaming than other types of equity grants (e.g., restricted stock grants). To prevent or discourage managerial gaming, firms should preset all terms of the equity grant in advance and link its future payoff to average stock prices (e.g., by granting Asian stock options).
Tian, Y. (2015), "Implied Binomial Trees with Cubic Spline Smoothing", Journal of Derivatives, 22, 40-55.
The binomial model is a workhorse of numerical option pricing. But the plain vanilla model produces a risk-neutral probability density for the stock price at expiration that becomes lognormal in the limit. This is consistent with Black–Scholes’ assumptions but not with actual option prices in the market. An alternative is an implied tree, which begins with the risk-neutral density extracted from the market prices for options with the desired maturity. The procedure constructs a lattice that is consistent with the desired distribution. An N-step tree has N + 1 terminal nodes, so fitting the tree to the market prices can be quite time consuming. The author proposes a simplification that greatly increases efficiency with negligible cost in accuracy. The trick is to calibrate only a subset of the terminal nodes to prices in the options market and fill in the other nodes by cubic spline interpolation.
Feng, Y., Nandy, D. and Tian, Y. (2015), "Executive Compensation and the Corporate Spin-off Decision", Journal of Economics and Business, 77, 94-117.Keywords
We investigate the effect of CEO equity incentives on corporate spin-off decisions and find that CEOs with stronger equity incentives are, ceteris paribus, more likely to engage in corporate spin-offs (after correcting for potential endogeneity concerns). In addition to confirming previous findings that spin-offs are followed by positive announcement and long-run abnormal stock returns, we show that the level of the CEO’s incentives matters. In particular, we find that while low incentive firms have a stronger announcement effect, high incentive firms experience better long run stock performance following spin-offs. This is consistent with the disciplining effect of spin-offs since low incentive firms are also found to have more independent boards. While a stronger board may be more influential on key corporate decisions (e.g., spin-offs), better incentive alignment leads to superior long run performance. Our results thus suggest that while stronger corporate governance may serve as a substitute mechanism for managerial equity incentives in the short run, they are in fact complementary in the long run.
Tian, Y. (2013), "Ironing out the Kinks in Executive Compensation: Linking Incentive Pay to Average Stock Prices", Journal of Banking and Finance, 37, 415-432.Keywords
Traditional stock option grant is the most common form of incentive pay in executive compensation. Applying a principal-agent analysis, we find this common practice suboptimal and firms are better off linking incentive pay to average stock prices. Among other benefits, averaging reduces volatility by about 42%, making the incentive pay more attractive to risk-averse executives. Holding the cost of the option grant to the firm constant, Asian stock options are more cost effective than traditional stock options and provide stronger incentives to increase stock price. More importantly, the improvement is achieved with little impact on the option grant’s risk incentives (after adjusting for option cost). Finally, averaging also improves the value and incentive effects of indexed stock options.
Jiang, G.J. and Tian, Y. (2012), "A Random Walk down the Options Market", Journal of Futures Markets, 32(6), 505-535.Keywords
Under efficient market hypothesis, option-implied forward variance forms a martingale and changes in forward variance follow a random walk. In this paper, we extract forward variance from option prices following a model-free approach and empirically test the random walk hypothesis. Although results from standard orthogonality tests support the martingale restriction, further results from autoregressive regressions seem to reject the martingale restriction as daily changes in forward variance are found to exhibit negative autocorrelation. However, this anomalous pattern of negative correlation is fully explained by illiquidity effects. Overall, the findings support the random walk hypothesis and informational efficiency of the options market.
Courses TaughtFINE3810, FINE4800, FINE5200, FINE6200, FINE6800, MFIN5400, FNEN6850, FINE7300
Project Title Role Award Amount Year Awarded Granting Agency Project TitleStock-based compensation and corporate risk management RolePrincipal Investigator Award Amount$94,927.00 Year Awarded2016-2022 Granting AgencySocial Sciences and Humanities Research Council Project TitleIroning Out the Wrinkles in Executive Compensation: Linking Incentive Pay to Average Stock Prices RolePrincipal Investigator Award Amount$63,509.00 Year Awarded2011-2014 Granting AgencySocial Sciences and Humanities Research Council - Standard Research Grant Project TitleCorporate Governance, Managerial Equity Incentives, and Firm Productivity RolePrincipal Investigator Award Amount$62,000.00 Year Awarded2007-2010 Granting AgencySocial Sciences and Humanities Research Council - Standard Research Grant Project TitleExecutive stock options, hidden action and moral hazard: theory and evidence RolePrincipal Investigator Award Amount$97,823.00 Year Awarded2002-2005 Granting AgencySocial Sciences and Humanities Research Council - Standard Research Grant