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Arbitrage Pricing Theory and the Capital Asset Pricing Model: Evidence from the Eurodollar Bond MarketJordan-Wagner, James M. (James Michael) 05 1900 (has links)
Monthly returns on twenty-seven Eurobonds from July 1982 to June 1986 were examined. There were no consistent differences in returns based on the country in which a firm is located. There were consistent differences due to industry classification, with energy-related firms exhibiting higher average returns and variances.
Excess returns were calculated using the capital asset pricing model and arbitrage pricing theory. The results from calculation of mean average deviation, root mean square, and R2 all indicate that the arbitrage pricing theory was a better descriptor of the Eurobond market.
The excess returns were also examined using stochastic dominance. Arbitrage pricing theory never dominated the capital asset pricing model using first-order criteria, but consistently dominated using second-order criteria. The results were discussed in terms of the implications for investors and portfolio managers.
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Applications of AI in Non-Stationary MarketsKaratas, Tugce January 2023 (has links)
Artificial intelligence, AI, has received increasing attention from the finance industry over recent years. There have been many successful applications of AI in finance, including but not limited to derivative pricing, asset management, credit risk, algorithmic trading, and simulation of time series with stylized facts. This thesis introduces various applications of AI in two major fields, namely (a) quantitative/computational finance and (b) asset management. In each chapter, we address non-stationarity of markets under consideration and focus on building methodologies that would work under the non-stationary behavior of those market.
In computational finance, fast and accurate algorithms are of great importance, especially when analytical solutions are unavailable. Although traditional methods are reliable and easily explainable, they are computationally expensive. Transform methods like Fast-Fourier transform provide faster option pricing, yet they cannot be applied to path-dependent products. In Chapter 2, we build a pricing engine based on supervised deep neural networks. We show that neural networks can replicate major stochastic processes with or without stochastic volatility in both pure diffusion and pure jump frameworks. We validate our models across different ranges of model parameters. Supervised neural networks accelerate the derivative pricing significantly compared to traditional methods.
Applications of AI in asset management are triggered by different dynamics, but they are fully data-driven and thus rely on the availability of data. Chapter 3 proposes a novel prediction framework for cash flow forecasting of illiquid products/assets. Our single-step neural network model provides the investors and managers of funds with a tool to manage the liquidity of their cash flows for financial planning. Our framework is also sensitive to adverse market conditions that could help prepare for upcoming crises such as Covid. In Chapter 4, we propose novel methodologies for mergers and acquisitions (M&A) to predict the deal announcement based on rumors and takeover success. M&A data is highly imbalanced in nature, and the cost of misclassifying a cancelled rumor/cancelled deal as announced deal/takeover success is higher than the other. Hence, we utilize sequential model-based optimization with tree-parzen estimators to maximize the recall score by tuning hyperparameters of neural networks. We improve the recall by 10% without sacrificing accuracy, and our results show that the proposed methodology is robust against changing market environments. In the last chapter, we build a two-step neural network model for sector rotation strategies using macroeconomic variables. The portfolio built based on our proposed model not only beats the benchmark portfolio but can also predict longer horizons.
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Liquidity risk and no arbitrageEl Ghandour, Laila 03 1900 (has links)
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.
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The transmission of global liquidity shocks in China. / CUHK electronic theses & dissertations collectionJanuary 2012 (has links)
This paper investigates the role of the global excess liquidity for macroeconomic variables, especially asset prices and external imbalance in China. We estimate structural VAR model and find evidence that the surge in global liquidity has limited effects on China's price level, output and asset prices. By inspecting the structural decomposition, we find that global output and inflation shocks affect domestic macroeconomic fluctuation. Using sign restrictions, we estimate the impacts of three structural shocks in driving the external imbalance and find that the global excess liquidity is a relevant factor while the shock to financial market may be a more important role in explaining the external imbalance than productivity shock. / Sun, Yun. / Thesis (M.Phil.)--Chinese University of Hong Kong, 2012. / Includes bibliographical references (leaves 57-63). / Electronic reproduction. Hong Kong : Chinese University of Hong Kong, [2012] System requirements: Adobe Acrobat Reader. Available via World Wide Web. / Chapter 1. --- Introduction --- p.1 / Chapter 1.1. --- Introduction --- p.2 / Chapter 1.2. --- Theoretical background --- p.6 / Chapter 2. --- Data and methodology --- p.14 / Chapter 2.1. --- Data description --- p.14 / Chapter 2.2. --- Methodology --- p.16 / Chapter 3. --- Results and Interpretation --- p.21 / Chapter 3.1. --- Domestic SVAR results --- p.21 / Chapter 3.2. --- A global SVAR analysis for China --- p.35 / Chapter 4. --- Three structural shocks and global imbalance --- p.47 / Chapter 4.1. --- Sign restrictions analysis --- p.47 / Chapter 4.2. --- Empirical Evidence --- p.50 / Chapter 5. --- Conclusion --- p.54 / Chapter A. --- Data --- p.64
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An investigation of dividend signalling on the New Zealand Stock Exchange in the 1990s and of several new tools employable in such an investigation : a thesis submitted in partial fulfillment of the requirements for the degree of PhD in Finance in the University of Canterbury /Anderson, Warwick W. January 2006 (has links)
Thesis (Ph.D.)--University of Canterbury, 2006. / Typescript (photocopy). Includes bibliographical references (p. 223-236). Also available via the World Wide Web.
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The current role of modern portfolio theory in asset management practice in South AfricaGaraba, Masimba January 2005 (has links)
This research examines the role that modern portfolio theory (MPT) plays in current South Africa asset management practice in comparison to other portfolio management techniques and security evaluation methods. The purpose of asset management is to pool complementary financial market expertise, in order to generate returns in excess of the market return on the investments of the owners of financial resources that are entrusted to the firm, since the owners of financial resources might not be able to make superior investment decisions on their own. The research presents and discusses the literature pertaining to modern portfolio theory, traditional portfolio theory (fundamental and technical analyses), and behavioural finance theory. The implication of the efficient market hypothesis in relation to all the portfolio management theories is also presented and discussed. In line with a positivist paradigm, the survey research methodology, which combines both qualitative and quantitative aspects, was adopted. The instrument used for data collection was a questionnaire, which was found to be reliable and valid for this research. The questionnaire encompassed the Lickert scale to measure the data. The results of the analysis were interpreted using descriptive statistics. The results of this research suggest that modern portfolio theory does not play a significant role in the management of portfolios and security evaluation in South Africa. South African asset managers regard fundamental analysis as the most significant method of security evaluation in the management of portfolios. Technical analysis and econometric models are regarded as playing a moderate role and complement fundamental analysis whilst behavioural finance models play the least role. This research recommends an integrated portfolio management strategy that incorporates MPT, traditional portfolio theory and behavioural finance models to enhance investor value and protection.
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A study of the Consumption Capital Asset Pricing Model's appilcability across four countriesSpurway, Kayleigh Fay Nanette January 2014 (has links)
Historically, the Consumption Capital Asset Pricing Method (C-CAPM) has performed poorly in that estimated parameters are implausible, model restrictions are often rejected and inferences appear to be very sensitive to the choice of economic agents' preferences. In this study, we estimate and test the C-CAPM with Constant Relative Risk Aversion (CRRA) using time series data from Germany, South Africa, Britain and America during relatively short time periods with the latest available data sets. Hansen's GMM approach is applied to estimate the parameters arising from this model. In general, estimated parameters fall outside the bounds specified by Lund & Engsted (1996) and Cuthbertson & Nitzsche (2004), even though the models are not rejected by the J-test and are associated with relatively small minimum distances.
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An empirical investigation of asset-pricing models in AustraliaLimkriangkrai, Manapon January 2007 (has links)
[Truncated abstract] This thesis examines competing asset-pricing models in Australia with the goal of establishing the model which best explains cross-sectional stock returns. The research employs Australian equity data over the period 1980-2001, with the major analyses covering the more recent period 1990-2001. The study first documents that existing asset-pricing models namely the capital asset pricing model (CAPM) and domestic Fama-French three-factor model fail to meet the widely applied Merton?s zero-intercept criterion for a well-specified pricing model. This study instead documents that the US three-factor model provides the best description of Australian stock returns. The three US Fama-French factors are statistically significant for the majority of portfolios consisting of large stocks. However, no significant coefficients are found for portfolios in the smallest size quintile. This result initially suggests that the largest firms in the Australian market are globally integrated with the US market while the smallest firms are not. Therefore, the evidence at this point implies domestic segmentation in the Australian market. This is an unsatisfying outcome, considering that the goal of this research is to establish the pricing model that best describes portfolio returns. Given pervasive evidence that liquidity is strongly related to stock returns, the second part of the major analyses derives and incorporates this potentially priced factor to the specified pricing models ... This study also introduces a methodology for individual security analysis, which implements the portfolio analysis, in this part of analyses. The technique makes use of visual impressions conveyed by the histogram plots of coefficients' p-values. A statistically significant coefficient will have its p-values concentrated at below a 5% level of significance; a histogram of p-values will not have a uniform distribution ... The final stage of this study employs daily return data as an examination of what is indeed the best pricing model as well as to provide a robustness check on monthly return results. The daily result indicates that all three US Fama-French factors, namely the US market, size and book-to-market factors as well as LIQT are statistically significant, while the Australian three-factor model only exhibits one significant market factor. This study has discovered that it is in fact the US three-factor model with LIQT and not the domestic model, which qualifies for the criterion of a well-specified asset-pricing model and that it best describes Australian stock returns.
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Tydsberekening binne 'n APT-raamwerk / Market timing in APT frameworkBrevis, Tersia, 1967- 06 1900 (has links)
Die studie vergelyk die prestasie van 'n koop-en-hou-strategie met die van 'n
tydsberekeningstrategie binne die raamwerk van die arbitrasie-prysbepalingsteorie
(APT) op die nywerheidsindeks van die Johannesburgse Aandelebeurs (JA). Die
periode van die studie is oor twee tydperke, naamlik Januarie 1970 tot September
1987 en Januarie 1989 tot Junie 1997.
Die langtermyntendens van die nywerheidsindeks en APT-faktore is bepaal deur die
beste nie-reglynige model vir elke tydreeks te vind. Reglynige meervoudige
stapsgewyse regressie-ontleding is gebruik om die bewegings van die
nywerheidsindeks rondom die langtermyntendens te voorspel. Die sloeringsreekse van
die langtermyntendensresidutelling van die APT-faktore en die sloeringsreekse van die
eerste-ordeverskiltelling van die langtermyntendensresidutelling is as moontlike
voorspellers gebruik. Gegrond hierop is beslissingslyne ontwik:kel wat gebruik is vir
die implementering van 'n tydsberekeningstrategie.
Die resultate van die studie is die volgende:
• Waar die sloeringsreekse van die langtermyntendensresidutelling van die APTfaktore
as moontlike voorspellers gebruik is, is die risiko-aangepaste
opbrengskoers van 'n tydsberekeningstrategie 6, 41 persent en 0, 71 persent b6
die van 'n koop-en-hou-strategie vir tydperk een en twee onderskeidelik.
• Waar die sloeringsreekse van die eerste-ordeverskiltelling van die
langtermyntendensresidutelling van die APT-faktore as moontlike voorspellers
gebruik is, is die risiko-aangepaste opbrengskoers van 'n tydsberekeningstrategie 10,40 persent en 1,04 persent b6 die van 'n koop-enhou-
strategie vir tydperk een en twee onderskeidelik.
Die belangrikste gevolgtrekking van die studie is dat die APT en 'n
tydsberekeningstrategie teoreties en prakties versoenbaar is op die JA. Aanbevelings
vir toekomstige navorsing is die volgende: ( 1) sistematiese risikofaktore, anders as
makro-ekonomiese faktore, behoort identifiseer te word wat die voorspellingswaarde
van die faktore in die tweede tydperk van die studie kan verhoog; (2) elke stap van die
model wat ontwikkel is, behoort op elke indeks van die JA toegepas te word om die
risiko-aangepaste opbrengskoers van 'n tydsberekeningstrategie toegepas op elkeen
van die indekse met die van 'n koop-en-hou-strategie te vergelyk; en (3) die invloed
van transaksiekoste en dividende op die potensiele voordele van tydsberekening moet
bepaal word. / The study compares the performance of a buy-and-hold strategy with that of a markettiming
strategy in the framework of the arbitrage pricing theory (APT) applied to the
industrial index of the Johannesburg Stock Exchange (JSE). The study period is
divided into two parts, namely January 1970 to September 1987 and January 1989 to
June 1997.
The long-term trend of the industrial index and every APT factor is determined by
finding the best nonlinear model for each time series. Linear multiple stepwise
regression analysis, with the lagged time series of the long-term trend error terms of
the APT factors, is used to forecast the movement of the industrial index around its
long-term trend. Decision lines were developed to implement a market-timing
strategy.
The results of the study are as follows:
• Where the lagged time series of the long-term trend error terms of the APT
factors were used as possible predictors, the risk-adjusted return of a markettiming
strategy was 6, 41 percent and 0, 71 percent higher than that of a buyand-
hold strategy for periods one and two respectively.
• Where the lagged time series of the first-order difference of the long-term trend
error term of the APT factors were used as possible predictors, the riskadjusted
return of the market-timing strategy was 10,40 percent and 1,04
percent higher than that of a buy-and-hold strategy for periods one and two
respectively.
The main conclusion of the study is that the APT and a market-timing strategy are
theoretically and practically reconcilable on the JSE. The main recommendations of
the study are the following: (1) systematic risk factors, other than macroeconomic
factors, should be identified in order to increase the forecasting value of these factors
in the second period of the study; (2) each step of the model developed in this study
should be repeated on every index of the JSE; and (3) the influence of transaction costs
and dividends on the potential benefits of a market-timing strategy should be
determined. / Business Management / DCom (Sakebestuur)
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Political and economic events 1988 to 1998 : their impact on the specification of the nonlinear multifactor asset pricing model described by the arbitrage pricing theory for the financial and industrial sector of the Johannesburg Stock ExchangeStephanou, Costas Michael 05 1900 (has links)
The impact of political and economic events on the asset pricing model described by the
arbitrage pricing theory (APTM) was examined in order to establish if they had caused any
changes in its specification. It was concluded that the APTM is not stationary and that it must
be continuously tested before it can be used as political and economic events can change its
specification. It was also found that political events had a more direct effect on the
specification of the APTM, in that their effect is more immediate, than did economic events,
which influenced the APTM by first influencing the economic environment in which it
operated.
The conventional approach that would have evaluated important political and economic
events, case by case, to determine whether they affected the linear factor model (LFM), and
subsequently the APTM, could not be used since no correlation was found between the
pricing of a risk factor in the LFM and its subsequent pricing in the APTM. A new approach
was then followed in which a correlation with a political or economic event was sought
whenever a change was detected in the specification of the APTM. This was achieved by first
finding the best subset LFM, chosen for producing the highest adjusted R2
, month by month,
over 87 periods from 20 October1991 to 21 June 1998, using a combination of nine
prespecified risk factors (five of which were proxies for economic events and one for
political events). Multivariate analysis techniques were then used to establish which risk
factors were priced most often during the three equal subperiods into which the 87 periods
were broken up.
Using the above methodology, the researcher was able to conclude that political events
changed the specification of the APTM in late 1991. After the national elections in April
1994 it was found that the acceptance of South Africa into the world economic community
had again changed the specification of the APTM and the two most important factors were
proxies for economic events. / Business Leadership / DBL
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