Recent nancial crises have highlighted the sensitivity and vulnerability of nancial markets
to in
ation, which reduces the value of money and a ects the net returns of nancial instruments.
In response to this, investors who are concerned with maintaining their investment's
purchasing power rather than its market value are resorting to in
ation linked (IL) products
to hedge their in
ation risk. Consequently, the in
ation market has been rapidly growing for
the last decade and has further great potential growth worldwide. It is highly probable that
in
ation linked derivatives will eventually be as common as conventional products. Another
cause of the in
ation market boost is the growing extension of the time frame of nancial
transactions, which has generated an increase in in
ation expectation; since 1980 the average
time to maturity of long-dated transactions went from one decade to three decades.
This is, in part, due to the ageing population in the developed world. This research investigates
some alternative models in order to improve the match between model prices and
observed prices in the American and South African in
ation markets. It takes into account
the relative illiquidity of IL products. The main tools used are L evy distributions, macroeconomic
factors, no-arbitrage and pricing kernel models. L evy processes can replicate the
behaviour of the return innovations of a wide range of nancial securities. Adding a stochastic
time change to the L evy process randomises the market clock, thus generating stochastic
volatilities, higher stochastic return moments and eventually stochastic skewness. These are
observed stylised facts most conventional models do not achieve. Moreover, in contrast to
the hidden factor approach, each L evy process component and its stochastic time change
can readily be assigned an economic meaning. This explicit economic mapping facilitates
the interpretation of current models and provides a more intuitive approach to building
new models that capture other observed behaviours. Finally, L evy processes also provide
tractable formulas for derivative pricing and market estimations. In general, in
ation is a
consequence of macroeconomic factors. Exogenous dynamics of the most signi cant of these
factors are used to deduce the endogenous in
ation dynamics in some of the considered
models. In these cases, the calibration of the pricing kernel models requires little historical data on IL derivatives. In fact, the required macroeconomic historical data is easily available
because of the current national and international legislation.
| Identifer | oai:union.ndltd.org:netd.ac.za/oai:union.ndltd.org:wits/oai:wiredspace.wits.ac.za:10539/7260 |
| Date | 15 September 2009 |
| Creators | Takadong, Thibaut Zafack |
| Source Sets | South African National ETD Portal |
| Language | English |
| Detected Language | English |
| Type | Thesis |
| Format | application/pdf |
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