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Portfolio risk measures and option pricing under a Hybrid Brownian motion model

The 2008/9 financial crisis intensified the search for realistic return models, that capture
real market movements. The assumed underlying statistical distribution of financial returns
plays a crucial role in the evaluation of risk measures, and pricing of financial instruments.
In this dissertation, we discuss an empirical study on the evaluation of the traditional
portfolio risk measures, and option pricing under the hybrid Brownian motion model, developed
by Shaw and Schofield. Under this model, we derive probability density functions
that have a fat-tailed property, such that “25-sigma” or worse events are more probable. We then
estimate Value-at-Risk (VaR) and Expected Shortfall (ES) using four equity stocks listed on
the Johannesburg Stock Exchange, including the FTSE/JSE Top 40 index. We apply the historical
method and Variance-Covariance method (VC) in the valuation of VaR. Under the VC
method, we adopt the GARCH(1,1) model to deal with the volatility clustering phenomenon.
We backtest the VaR results and discuss our findings for each probability density function.
Furthermore, we apply the hybrid model to price European style options. We compare the
pricing performance of the hybrid model to the classical Black-Scholes model. / Dissertation (MSc)--University of Pretoria, 2017. / National Research Fund (NRF), University of Pretoria Postgraduate bursary and the General
Studentship bursary / Mathematics and Applied Mathematics / MSc / Unrestricted

Identiferoai:union.ndltd.org:netd.ac.za/oai:union.ndltd.org:up/oai:repository.up.ac.za:2263/64068
Date January 2017
CreatorsMbona, Innocent
ContributorsVan Zyl, Gusti, inmbona@gmail.com, Kufakunesu, Rodwell
PublisherUniversity of Pretoria
Source SetsSouth African National ETD Portal
LanguageEnglish
Detected LanguageEnglish
TypeDissertation
Rights© 2018 University of Pretoria. All rights reserved. The copyright in this work vests in the University of Pretoria. No part of this work may be reproduced or transmitted in any form or by any means, without the prior written permission of the University of Pretoria.

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