Essays On Equilibrium Valuation Of Options Theorem And Empirical Estimates
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Essays On Equilibrium Valuation Of Options Theorem And Empirical Estimates
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Author :
language : en
Publisher:
Release Date : 1997
Essays On Equilibrium Valuation Of Options Theorem And Empirical Estimates written by and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 1997 with categories.
Essays On Equilibrium Valuation Of Options Theorem And Empirical Estimates
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Author : Melanie Cao
language : en
Publisher:
Release Date : 1997
Essays On Equilibrium Valuation Of Options Theorem And Empirical Estimates written by Melanie Cao and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 1997 with categories.
This thesis consists of three essays which study the valuation of options in an equilibrium framework. The first essay uses a general equilibrium model to study the valuation of options on the market portfolio with predictable returns and stochastic volatility in a complete market. In a closed endowment economy where aggregate dividend is the only source of uncertainty, I investigate why the stock return exhibits certain predictable features. I also examine the equilibrium relationship between the price of the market portfolio and its volatility, as well as the relationship between the spot interest rate and the market volatility. Equilibrium conditions imply that the predictable feature of the market portfolio is induced by the mean-reverting of the rate of dividend growth. It is shown that there is strong interdependence between the stock price process and its volatility process. Using the Euler equation, I derive equilibrium pricing formulas for options on the market portfolio which incorporate both stochastic volatility and stochastic interest rates. Since there is only one source of uncertainty, this model preserves the completeness feature for hedging and risk management purposes. With realistic parameter values, numerical examples show that stochastic volatility and stochastic interest rates are both necessary for correcting the Black-Scholes pricing biases. The second essay focuses on the currency options in an incomplete market where the economy is subject to shocks in aggregate dividend and money supply. The key feature is that the exchange rate exhibits systematic jump risks which should be priced in the currency options. The closed-endowment equilibrium model in the first essay is extended to a small open monetary economy with stochastic jump-diffusion processes for both the money supply and aggregate dividend. It is shown that the exchange rate is affected by both government monetary policies and aggregate dividends. Since the jump in the exchange rate is correlated with aggregate consumption, the jump risk in the exchange rate derived from aggregate consumption must be priced by means of utility maximization. I further derive the foreign agents' risk-neutral valuation of the European currency option and provide restrictions that ensure the law of one price in currency option pricing. In general, these restrictions depend on the agent's risk preference. The objective of the third essay is to empirically study the existence of systematic jump risks in exchange rates and analyze their importance for currency option pricing. The empirical study is based on the theoretical model studied in the second essay, which argues that exchange rates are inherently correlated with the market and so must exhibit systematic jump risks. The third essay uses the maximum-likelihood method to estimate the joint distribution of exchange rates and the price of the market portfolio. Empirical results show that it is important to incorporate both systematic and non-systematic jump components in exchange rates in order to correctly price currency options.
Theory Of Valuation
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Author : Sudipto Bhattacharya
language : en
Publisher: World Scientific
Release Date : 2005
Theory Of Valuation written by Sudipto Bhattacharya and has been published by World Scientific this book supported file pdf, txt, epub, kindle and other format this book has been release on 2005 with Business & Economics categories.
The first edition of Theory of Valuation is a collection of important papers in the field of theoretical financial economics published from 1973 to 1986, and original accompanying essays contributed by eminent researchers including Robert C Merton, Edward C Prescott, Stephen A Ross, and Joseph E Stiglitz. Since then, with the perspective of major theoretical strides in the field, the book has more than fulfilled its original expectations. The realization that it remains today a compendium of classic articles and a must-read for any serious student in theoretical financial economics, has prompted the publication of a new edition. This second edition presents a summary statement of significant research in theoretical financial economics for both the specialist and non-specialist financial economist. It also provides material for PhD-level courses covering valuation theory, and elective reading for advanced MasterOCOs and undergraduate courses. In addition to reproducing the original contributions, this edition includes the seminal paper by Edward C Prescott and Rajnish Mehra, OC Recursive Competitive Equilibrium: The Case of Homogeneous Households, OCO originally published in Econometrica in 1980."
Three Essays In Theoretical And Empirical Derivative Pricing
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Author : Hamed Ghanbari
language : en
Publisher:
Release Date : 2017
Three Essays In Theoretical And Empirical Derivative Pricing written by Hamed Ghanbari and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2017 with categories.
The first essay investigates the option-implied investor preferences by comparing equilibrium option pricing models under jump-diffusion to option bounds extracted from discrete-time stochastic dominance (SD). We show that the bounds converge to two prices that define an interval comparable to the observed option bid-ask spreads for S&P 500 index options. Further, the bounds' implied distributions exhibit tail risk comparable to that of the return data and thus shed light on the dark matter of the divergence between option-implied and underlying tail risks. Moreover, the bounds can better accommodate reasonable values of the ex-dividend expected excess return than the equilibrium models' prices. We examine the relative risk aversion coefficients compatible with the boundary distributions extracted from index return data. We find that the SD-restricted range of admissible RRA values is consistent with the macro-finance studies of the equity premium puzzle and with several anomalous results that have appeared in earlier option market studies.The second essay examines theoretically and empirically a two-factor stochastic volatility model. We adopt an affine two-factor stochastic volatility model, where aggregate market volatility is decomposed into two independent factors; a persistent factor and a transient factor. We introduce a pricing kernel that links the physical and risk neutral distributions, where investor's equity risk preference is distinguished from her variance risk preference. Using simultaneous data from the S&P 500 index and options markets, we find a consistent set of parameters that characterizes the index dynamics under physical and risk-neutral distributions. We show that the proposed decomposition of variance factors can be characterized by a different persistence and different sensitivity of the variance factors to the volatility shocks. We obtain negative prices for both variance factors, implying that investors are willing to pay for insurance against increases in volatility risk, even if those increases have little persistence. We also obtain negative correlations between shocks to the market returns and each volatility factor, where correlation is less significant in transient factor and therefore has a less significant effect on the index skewness. Our empirical results indicate that unlike stochastic volatility model, join restrictions do not lead to the poor performance of two-factor SV model, measured by Vega-weighted root mean squared errors.In the third essay, we develop a closed-form equity option valuation model where equity returns are related to market returns with two distinct systematic components; one of which captures transient variations in returns and the other one captures persistent variations in returns. Our proposed factor structure and closed-form option pricing equations yield separate expressions for the exposure of equity options to both volatility components and overall market returns. These expressions allow a portfolio manager to hedge her portfolio's exposure to the underlying risk factors. In cross-sectional analysis our model predicts that firms with higher transient beta have a steeper term structure of implied volatility and a steeper implied volatility moneyness slope. Our model also predicts that variances risk premiums have more significant effect on the equity option skew when the transient beta is higher. On the empirical front, for the firms listed on the Dow Jones index, our model provides a good fit to the observed equity option prices.
Dissertation Abstracts International
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Author :
language : en
Publisher:
Release Date : 2007
Dissertation Abstracts International written by and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2007 with Dissertations, Academic categories.
Equilibrium Option Prices For A Class Of Distributions
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Author : Jongchai Kim
language : en
Publisher:
Release Date : 1996
Equilibrium Option Prices For A Class Of Distributions written by Jongchai Kim and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 1996 with Goodness-of-fit tests categories.
Essays On The Interaction Of Option And Equity Markets
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Author : Alexander Feser
language : en
Publisher:
Release Date : 2020
Essays On The Interaction Of Option And Equity Markets written by Alexander Feser and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2020 with categories.
How do option and equity markets interact with each other? This is the central question that is answered from three different angles in this dissertation. The first Chapter discusses how option-implied information is incorporated into equity markets. Based on a novel rescaled option-implied Value-at-Risk (rVaR) measure, it is shown that option-implied information is priced differently depending on whether it is based on options with strikes close to the current price of the underlying or far-out-of-the-money options. The findings provide novel insights in the joint interaction between option and equity markets and help to explain contradictory results in previous studies. The second chapter provides an in-depth analysis of how to estimate risk-neutral moments robustly. A simulation and an empirical study show that estimating risk-neutral moments presents a trade-off between (1) the bias of estimates caused by a limited strike price domain and (2) the variance of estimates induced by micro-structural noise. The best trade-off is offered by option-implied quantile moments estimated from a volatility surface interpolated with a local-linear kernel regression and extrapolated linearly. The third chapter expands volatility targeting to option strategies. The chapter shows that option trading strategies can be managed by increasing exposure if volatility is low and reducing exposure if volatility is high to achieve a constant risk exposure over time. These volatility controlled option strategies generate economically and statistically significant alphas over their unmanaged counterparts, have reduced maximum drawdowns, lower downside risk, and more normal return distributions.
American Doctoral Dissertations
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Author :
language : en
Publisher:
Release Date : 1997
American Doctoral Dissertations written by and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 1997 with Dissertation abstracts categories.
Essays In Empirical Industrial Organization
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Author : Zhou Yang
language : en
Publisher:
Release Date : 2007
Essays In Empirical Industrial Organization written by Zhou Yang and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2007 with categories.
The focus of this thesis is on issues of empirical industrial organization. Specifically, I utilize tools and ideas from Industrial organization to study areas of health and history. In Chapter 1, I examine the relationship between how hospital ownership is organized and the intensity of competition in the US health care market. I study the question using an empirical entry model. These models typically exhibit multiple equilibria. To resolve this problem, a novel algorithm that computes all the equilibria of the game is developed. My findings suggest that for-profit and not-for-profit hospitals can be regarded as supplying differentiated products. I also find evidence suggesting that markets that have both types of hospitals enjoy a higher level of health care services. Chapter 2 is coauthored with Eugene Choo. In this chapter, we investigate the variation of winning bids in slave auctions held in New Orleans from 1804 to 1862. Specifically, we measure the variation in the price of slaves conditional on their geographical origin. Previous work using a regression framework ignored the auction mechanism used to sell slaves. This introduces a bias in the conditional mean of the winning bid. Unfortunately, the number of bidders is unobserved by the econometrician. We adopt the standard framework of a symmetric independent private value auction and propose an estimation strategy to overcome this bias. We find the number of bidders had a significant positive effect on the average winning bid. The price variation according to the geographical origin of slaves found in earlier work continued to persist after accounting for the omitted variable. Chapter 3 is coauthored with Henry Overman, Diego Puga, and Matthew Turner. In this chapter, we study the relationship between urban sprawl and obesity. Using data that tracks individuals over time, we find no evidence that urban sprawl causes obesity. We show that previous findings of a positive relationship most likely reflect a failure to properly control for the fact the individuals who are more likely to be obese choose to live in more sprawling neighborhoods. Our results indicate that current interest in changing the built environment to counter the rise in obesity is misguided.
Essays In The Empirical Analysis Of Auction Markets
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Author : Ali Hortaçsu
language : en
Publisher:
Release Date : 2001
Essays In The Empirical Analysis Of Auction Markets written by Ali Hortaçsu and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2001 with categories.