Thesis (MSc)--Stellenbosch University, 2013. / ENGLISH ABSTRACT: In modern theory of finance, the so-called First and Second Fundamental Theorems of Asset Pricing play an important role in pricing options with no-arbitrage. These theorems gives a necessary and sufficient conditions for a market to have no-arbitrage and for a market to be complete. An early version of the First Fundamental Theorem of Asset Pricing was proven by Harrison and Kreps [30] in the case of a finite probability space. A more general version was proven by Harrison and Pliska [31] in the case of a finite probability space and discrete time. In the case of continuous time, Delbaen and Schachermayer [19] introduced a more general concept of no-arbitrage called "No-Free Lunch With Vanishing Risk" (NFLVR), and showed that for a locally-bounded semimartingale price process NFLVR is essentially equivalent to the existence of an equivalent local martingale measure. The goal of this thesis is to review the theory of arbitrage pricing and the extension of this theory to include liquidity risk. At the current time, liquidity risk is a key challenge faced by investors. Consequently there is a need to develop more realistic pricing models that include liquidity risk. We present an approach to liquidity risk by Çetin, Jarrow and Protter [10]. In to this approach the liquidity risk is embedded into the classical theory of arbitrage pricing by having investors act as price takers, and assuming the existence of a supply curve where prices depend on trade size. This framework assumes that the quantity impact on the price transacted is momentary. Using trading strategies that are both continuous and of finite variation allows one to avoid liquidity costs. Therefore, the First and Second Fundamental Theorems of Asset Pricing and the Black-Scholes model can be extended. / AFRIKAANSE OPSOMMING: In moderne finansiële teorie speel die sogenaamde Eerste en Tweede Fundamentele Stellings van Bateprysbepaling ’n belangrike rol in die prysbepaling van opsies in arbitrage-vrye markte. Hierdie stellings gee nodig en voldoende voorwaardes vir ’n mark om vry van arbitrage te wees, en om volledig te wees. ’n Vroeë weergawe van die Eerste Fundamentele Stelling was deur Harrison en Kreps [30] bewys in die geval van ’n eindige waarskynlikheidsruimte. ’n Meer algemene weergawe was daarna gepubliseer deur Harrison en Pliska [31] in die geval van ’n eindige waarskynlikheidsruimte en diskrete tyd. In die geval van kontinue tyd het Delbaen en Schachermayer [19] ’n meer algemene konsep van arbitragevryheid ingelei, naamlik “No–Free–Lunch–With–Vanishing–Risk" (NFLVR), en aangetoon dat vir lokaalbegrensde semimartingaalprysprosesse NFLVR min of meer ekwivalent is aan die bestaan van ’n lokaal martingaalmaat. Die doel van hierdie tesis is om ’n oorsig te gee van beide klassieke arbitrageprysteorie, en ’n uitbreiding daarvan wat likideit in ag neem. Hedendaags is likiditeitsrisiko ’n vooraanstaande uitdaging wat beleggers die hoof moet bied. Gevolglik is dit noodsaaklik om meer realistiese modelle van prysbepaling wat ook likiditeitsrisiko insluit te ontwikkel. Ons bespreek die benadering van Çetin, Jarrow en Protter [10], waar likiditeitsrisiko in die klassieke arbitrageprysteorie ingesluit word deur die bestaan van ’n aanbodkromme aan te neem, waar pryse afhanklik is van handelsgrootte. In hierdie raamwerk word aangeneem dat die impak op die transaksieprys slegs tydelik is. Deur gebruik te maak van handelingsstrategië wat beide kontinu en van eindige variasie is, is dit dan moontlik om likiditeitskoste te vermy. Die Eerste en Tweede Fundamentele Stellings van Bateprysbepaling en die Black–Scholes model kan dus uitgebrei word om likiditeitsrisiko in te sluit.

Thesis (MBA (Business Management))--University of Stellenbosch, 2009. / ENGLISH ABSTRACT: Experimental research in psychology and economics indicates that depression causes heightened risk aversion. Previous research has documented robust links between seasonal variation in length of day, seasonal depression (known as seasonal affective disorder, or SAD), risk aversion and stock market returns. One such study provides international evidence that stock market returns vary seasonally with the length of the day, a result called the SAD effect. Stock returns are shown to be significantly related to the amount of daylight throughout the autumn and winter. Another study examines the SAD effect in the context of an equilibrium asset pricing model to determine whether the seasonality can be explained using a conditional version of the capital asset pricing model (CAPM) that allows the price of risk to vary over time. Given the above as the base departure point, this report analyses the SAD effect in the context of the South African capital market, where, firstly, the variation in length of day during the year is not so severe compared with other countries like Sweden and the UK and, secondly, a more recent dataset includes the effects of integrated markets and globalisation, that possibly resulted in a shift of seasonal behaviour in the market. It quantifies the SAD effect in general, across industry sectors, over time periods and confirms that a conditional CAPM holds in explaining the seasonality due to SAD. The results differ substantially from those of prior studies. The expected signs of the SAD and Aut coefficients are reversed. Closer analysis shows that seasonality in stock returns has undergone a shift compared to seasonality in an older dataset. A prior finding that effects, such as the SAD, are better explained using excess returns than using raw total returns of the market, is reinforced. The analysis of SAD over time sheds some light on the unexpected outcome of the SAD and Aut coefficients by providing evidence that the validity of regression models deteriorated over time and, more conclusively, that in two consecutive periods, the SAD and Aut coefficients decreased in absolute value. It also found that the coefficients are linearly related to excess returns during the latter period only. The conditional CAPM provides evidence that the effect of SAD is captured in the time variation in the price of risk. The factor of reducing the remainder of SAD in error terms is, however, remarkably smaller. The implication is that market risk already accounts for the SAD effect, but only to a degree, and that the remaining contribution of the SAD effect contained in varying the price of risk is substantially less significant. This finding coupled with the contradictory results in the signs of SAD and Aut coefficients renders evidence of SAD in the South African market rather inconclusive. / AFRIKAANSE OPSOMMING: Navorsing in die gebied waar sielkunde en ekonomie oorvleuel, toon dat depressie ‘n verlaagde risiko-aptyt meebring. Meer spesifiek, vorige navorsing dokumenteer dat robuuste skakels tussen seisoenale lengtes van dae, seisoenale depressie (beter bekend as winter depressie), risiko-aptyt en opbrengste op die andelebeurs bestaan. Een van hierdie studies, wat uitgevooer was op ’n aantal hoof internasionale markte, bevind dat opbrengste op die aandelebeurse wel seisoenaal varieer in ooreenstemming met die lengtes van dae. In dié studie word daar getoon dat opbrengste noemenswaardig ooreenstem met die hoeveelheid sonlig gedurende herfs en winter. ’n Ander studie bestudeer weer seisoenale depressie in konteks met ’n ekwilibrium kapitaal-bate prysmodel om vas te stel of seisoenaliteit verklaar kan word deur ’n kondisionele weergawe van hierdie model waar die prys van risiko varieer oor tyd. Met bogenoemde as vertrekpunt, analiseer die verslag wat volg winterdepressie in die Suid-Afrikaanse aandelemark waar, eerstens, die variasie in lengtes van dae gedurende die jaar minder is as vir ander lande soos Swede en Engeland, en tweedens, waar ’n meer onlangse datastel die effekte van geintegreerde markte en globalisasie insluit. Die verslag kwantifiseer seisoenale depressie in die algemeen op die effektebeurs, pas dan regressie-modelle toe op verskeie industrie-sektore en oor verskillende periodes. Ten einde, word bevestig dat ’n kondisionele kapitaal-bate prysmodel seisoenaliteit as gevolg van winterdepressie kan verklaar. Vergeleke met vorige studies, word daar teenstrydighede in die resultate opgemerk ten opsigte van die verwagte tekens van die koeffisiënte. Met nadere ondersoek word bevind dat die seisoenaliteit in opbrengste ’n verskuiwing ondergaan het vergeleke met ’n ouer datastel. ’n Vorige bevinding dat faktore, tipies soos seisoenale depressie, beter verklaar kan word deur alpha opbrengste (risiko vrye obrengste afgetrek) as rou opbrengste, word bevestig. Die analise oor tyd verklaar gedeeltelik die onverwagte koeëfisiënte. Daar word waargeneem dat die geldigheid van regressie modelle oor twee opeenvolgende tydperke verswak het. Verder word daar ook bevind dat die absolute waardes van die koeëfisiënte verklein het en dat koeëfisiënte ’n liniêre verwantskap met opbrengste toon, slegs in die latere tydperk. Die toepassing van ‘n kondisionele kapitaal-bate prysmodel bevestig dat seisoenale depressie teenwoordig is in die prys van risiko. Daar word verder bevestig dat mark risiko gedeeltelik seisoenale depressie verklaar en dat die oorblywende teenwoordigheid daarvan in die prys van risiko heelwat minder statistiese geldigheid het. Gegewe dit, tesame met die teenstrydigheid in die tekens van die koeëfisiënte, word enige duidelike konklusies ten opsigte van seisoenale depressie se teenwoordigheid in die Suid-Afrikaanse mark verhoed.

This thesis investigates systematic liquidity risk and short-term stock price reaction to large one-day price changes. We study 642 constituents of the FTSALL share index over the period from 1st July 1992 to 29th June 2007. We show that the US evidence of a priced systematic liquidity risk of Pastor and Stambaugh (2003) and Liu (2006) is not country-specific. Particularly, systematic liquidity risk is priced in the London Stock Exchange when Amihud's (2002) illiquidity ratio is used as a liquidity proxy. Given the importance of systematic liquidity risk in the asset pricing literature, we are interested in testing whether the different levels of systematic liquidity risk across stocks can explain the anomaly following large one-day price changes. Specifically, we expect that the stocks with high sensitivity to the fluctuations in aggregate market liquidity to be more affected by price shocks. We find that most liquid stocks react efficiently to price shocks, while the reactions of the least liquid stocks support the uncertain information hypothesis. However, we show that time-varying risk is more important than systematic liquidity risk in explaining the price reaction of stocks in different liquidity portfolios. Indeed, the time varying risk explains nearly all of the documented overreaction and underreaction following large one-day price changes. Our evidence suggests that the observed anomalies following large one-day price shocks are caused by the pricing errors arising from the use of static asset pricing models. In particular, the conditional asset pricing model of Harris et al. (2007), which allow both risk and return to vary systematically over time, explain most of the observed anomalies. This evidence supports the Brown et al. (1988) findings that both risk and return increase in a systematic fashion following price shocks.

有鑑於資產報酬常具有自我相關的特性，本文探討當標的資產報酬服從一階移動平均過程之選擇權（MA(1)-type option）評價。研究結果顯示，除了總變異因子（total volatility input）不同外，MA(1)-type option 的評價公式與 Black and Scholes 模型極為相似。而根據數值分析的結果，即使資產報酬間自我相關的程度薄弱，由一階移動平均過程產生之自我相關仍會對選擇權價值造成顯著影韾。 / This paper derives the closed-form formula for a European option on an asset with returns following a continuous-time type of first-order moving average process, which is named as an MA(1)-type option. The pricing formula of these options is similar to that of Black and Scholes except for the total volitility input. Specifically, the total volatility input of MA(1)-type options is the conditional standard deviation of continuous-compounded returns over the option's remaining life, whereas the total volatility input of Black and Scholes is indeed the diffusion coefficient of a geometric Brownian motion times the square root of an option's time to maturity. Based on the result of numerical analyses, the impact of autocorrelation induced by the MA(1)-type process is significant to option values even when the autocorrelation between asset returns is weak.

This thesis investigates pricing-performance of two recently developed multifactor asset-pricing models with the implementation of dual-betas dependent upon prevailing market-conditions. The models included in the study are the Fama and French five-factor model and the Q-factor model by Hou, Xue and Zhang. We test the models on cross-sectional Swedish stock-market data between 2003 and 2015 from the Large-, Mid- and Small Cap-lists and their respective precursors. The models are tested in their ability to explain portfolios sorted on firm beta-values, on a twelve-year period as well as a six-year period characterized by changing market directions and high market volatility.  In our study, we support the presence of changing risk-return relationship in up and down market states by estimating separate market betas with the risk-free rate as threshold. However, we do not find the isolated and volatile period to give rise to a larger difference in the up and down market betas. We consistently find the models to have a decreasing explanatory power on the portfolios of firms with lower beta values. We also find the largest difference in the up and down market betas occurring in the low beta portfolios, suggesting that this is causing measurement problems in the models. While making the models conditional, the measurement problem with the static beta seems to be reduced for the portfolios where the difference between up and down betas differ most. In the applied context, we conclude the conditional dual beta adds explanatory power in the models when the market beta differs in up and down market states.  The insights of this thesis support the method of making the market-beta conditional as suggested by Pettengill, Sundaram & Mathur (Pettengill, et al., 1995), in new multifactor models.

This thesis is a collection of three essays on hedge funds with contributions to the empirical understanding of their fees, and their voluntary disclosure of returns and assets under management, using a large consolidation of widely-employed publicly available hedge fund databases. First, time-series variation in reported fees is analysed using fund launches within hedge fund management companies, and conditioning fees at launch on fund family characteristics. Larger and better performing fund families launch high fee funds. Funds with high management fees at launch do not perform any differently from low fee funds, though funds with high incentive fees marginally outperform. An interval regression technique is proposed to overcome the discrete nature of reported fees. Secondly, the reliability of voluntary disclosures of financial information is analysed with a different measure of time-variation --- tracking changes to statements of historical performance recorded at different points in time. This uncovers evidence that historical returns are routinely revised. These revisions are not merely random or corrections of earlier mistakes; they are partly forecastable by fund characteristics. Moreover, funds that revise their performance histories, significantly and predictably underperform those that have never revised. Finally, the availability, and timing, of the selective disclosure of assets under management by funds is examined. More than a third of funds have asset records falling short of returns published. There is evidence of strategic disclosure by funds --- asset reporting drying up after times of fund stress, such as poor performance or outflows. Furthermore, investors should take heed of the greater propensity for shortfall funds to trigger fraud performance flags. These results suggest that unreliable disclosures: constitute a valuable source of information for current and potential investors; have implications for researchers; and, exhort market regulators to include assets, not just returns, in the debate around mandatory disclosure by financial institutions.

L'analyse statistique des données a été effectuée avec le logiciel R. / Au cours de la dernière décennie, l'Union Européenne a instauré une réglementation environnementale afin de limiter les émissions de Gaz à Effet de Serre sur son territoire. Ceci a contribué à la mise en place d'un marché du carbone européen (EU ETS) où s'échangent des certificats d'émission de CO2 (les EUA et les CER) ainsi que des produits dérivés reliés à ceux-ci. Ce mémoire aura pour objectif d'évaluer et de comparer différents modèles afin de représenter le prix des certificats d'émission et de tarifer les produits dérivés des marchés du carbone. / During the last decade, the European Union has regulated emissions of Greenhouse Gases on its own territory. Consequently, a European Carbon Market (EU ETS) is currently emerging where CO2 emission certificates (EUA and CER) and derivatives are traded on Exchanges. The objectif of this research is to evaluate and compare different models to represent the emission certificates' price and to price derivatives of the carbon markets.

Asset pricing implications of a DSGE model with recursive preferences and nominal rigidities. I study jointly macroeconomic dynamics and asset prices implied by a production economy featuring nominal price rigidities and Epstein-Zin (1989) preferences. Using a reasonable calibration, the macroeconomic DSGE model is consistent with a number of stylized facts observed in financial markets like the equity premium, a negative real term spread, a positive nominal term spread and the predictability of stock returns, without compromising the model's ability to fit key macroeconomic variables. The interest rate smoothing in the monetary policy rule helps generate a low risk-free rate volatility which has been difficult to achieve for standard real business cycle models where monetary policy is neutral. In an application, I show that the model provides a framework for analyzing monetary policy interventions and the associated effects on asset prices and the real economy. Macroeconomic news and the stock market: Evidence from the eurozone. This paper is an empirical study of excess return behavior in the stock market in the euro area around days when important macroeconomic news about inflation, unemployment or interest rates are scheduled for announcement. I identify state dependence such that equity risk premia on announcement days are significantly higher when the interests rates are in the vicinity of the zero lower bound. Moreover, I provide evidence that for the whole sample period, the average excess returns in the eurozone are only higher on days when FOMC announcements are scheduled for release. However, this result vanishes in a low interest rate regime. Finally, I document that the European stock market does not command a premium for scheduled announcements by the European Central Bank (ECB). The impact of ECB monetary policy surprises on the German stock market. We examine the impact of ECB monetary policy surprises on German excess stock returns and the possible reasons for such a response. First, we conduct an event study to asses the impact of conventional and unconventional monetary policy on stock returns. Second, within the VAR framework of Campbell and Ammer (1993), we decompose excess stock returns into news regarding expected excess returns, future dividends and future real interest rates. We measure conventional monetary policy shocks using futures markets data. Our main findings are that the overall variation in German excess stock returns mainly reflects revisions in expectations about dividends and that the stock market response to monetary policy shocks is dependent on the prevailing interest rate regime. In periods of negative real interest rates, a surprise monetary tightening leads to a decrease in excess stock returns. The channels behind this response are news about higher expected excess returns and lower future dividends.

Depuis quelques années, la recherche financière s'inscrit dans une nouvelle dynamique. La nécessité de mieux modéliser le comportement des rendements des actifs financiers et les risques sur les marchés pousse les chercheurs à trouver des mesures de risque plus adéquates. Ce travail de recherche se situe dans cette évolution, ayant admis les caractéristiques des séries financières par des faits stylisés tels que la non normalité des rendements. A travers cette thèse nous essayons de montrer l'importance d'intégrer des mesures de risque qui tiennent compte de la non normalité dans le processus d'évaluation et d'allocation des actifs financiers sur le marché français. Cette thèse propose trois chapitres correspondant chacun à un article de recherche académique. Le premier article propose de revisiter les modèles d'évaluation en prenant en compte des moments d'ordres supérieurs dans un cadre de downside risk. Les résultats indiquent que les downside co-moments d'ordres supérieurs sont déterminants dans l'explication des variations des rendements en coupe transversale. Le second chapitre propose de mettre en relation la rentabilité financière et le risque mesuré par la VaR ou la CVaR. Nous trouvons que la VaR présente un pouvoir explicatif plus élevé que celui de la CVaR et que l'approche normale est plus intéressante que l'approche basée sur l'expansion de Cornish-Fisher (1937). Ces deux résultats contredisent les prédictions théoriques mais nous avons pu démontrer qu'ils sont inhérents au marché français. Le troisième chapitre propose une autre piste, nous revisitons le modèle moyenne-CVaR dans un cadre dynamique et en présence des coûts de transaction / This dissertation is part of an ongoing researches looking for an adequate model that apprehend the behavior of financial asset returns. Through this research, we propose to analyze the relevance of risk measures that take into account the non-normality in the asset pricing and portfolio allocation models on the French market. This dissertation is comprised of three articles. The first one proposes to revisit the asset pricing model taking into account the higher-order moments in a downside framework. The results indicate that the downside higher order co-moments are relevant in explaining the cross sectional variations of returns. The second paper examines the relation between expected returns and the VaR or CVaR. A cross sectional analysis provides evidence that VaR is superior measure of risk when compared to the CVaR. We find also that the normal estimation approach gives better results than the approach based on the expansion of Cornish-Fisher (1937). Both results contradict the theoretical predictions but we proved that they are inherent to the French market. In the third paper, we review the mean-CVaR model in a dynamic framework and we take into account the transaction costs. The results indicate that the asset allocation model that takes into account the non-normality can improve the performance of the portfolio comparing to the mean-variance model, in terms of the average return and the return-to CVaR ratio. Through these three studies, we think that it is possible to modify the risk management framework to apprehend in a better way the risk of loss associated to the non-normality problem

This essay will compare the capital asset pricing model (CAPM), Fama and French threefactor model and Carhart´s four-factor model, to see which of these models that can explain portfolio excess returns best on the Swedish stock market. This thesis will tempt to validate the three and four-factor models because of the limited amount of research done on the Swedish stock market. The results indicate that the three-factor model improves explanatory power for portfolio returns in comparison to the CAPM, and the four-factor model gives a small improvement in the explanatory power compared to the three-factor model. The results also indicate that all models have a low explanatory power when the market is volatile.