This thesis centers around the pricing and risk-return tradeoff of credit and equity derivatives.
The first essay studies the pricing in the CDS Index (CDX) tranche market, and whether these instruments
have been reasonably priced and integrated within the financial market generally, both
before and during the financial crisis. We first design a procedure to value CDO tranches using
an intensity-based model which falls into the affine model class. The CDX tranche spreads are
efficiently explained by a three-factor version of this model, before and during the crisis period.
We then construct tradable CDX tranche portfolios, representing the three default intensity factors.
These portfolios capture the same exposure as the S&P 500 index optionmarket, to a market
crash. We regress these CDX factors against the underlying index, the volatility factor, and the
smirk factor, extracted from the index option returns, and against the Fama-French market, size
and book-to-market factors. We finally argue that the CDX spreads are integrated in the financial
market, and their issuers have not made excess returns.
The second essay explores the specifications of jumps for modeling stock price dynamics and
cross-sectional option prices. We exploit a long sample of about 16 years of S&P500 returns
and option prices for model estimation. We explicitly impose the time-series consistency when
jointly fitting the return and option series. We specify a separate jump intensity process which
affords a distinct source of uncertainty and persistence level from the volatility process. Our
overall conclusion is that simultaneous jumps in return and volatility are helpful in fitting the
return, volatility and jump intensity time series, while time-varying jump intensities improve the
cross-section fit of the option prices. In the formulation with time-varying jump intensity, both
the mean jump size and standard deviation of jump size premia are strengthened. Our MCMC
approach to estimate the models is appropriate, because it has been found to be powerful by
other authors, and it is suitable for dealing with jumps. To the best of our knowledge, our study
provides the the most comprehensive application of the MCMC technique to option pricing in
affine jump-diffusion models. / published_or_final_version / Economics and Finance / Doctoral / Doctor of Philosophy
| Identifer | oai:union.ndltd.org:HKU/oai:hub.hku.hk:10722/167211 |
| Date | January 2012 |
| Creators | Luo, Dan, 罗丹 |
| Contributors | Carverhill, AP |
| Publisher | The University of Hong Kong (Pokfulam, Hong Kong) |
| Source Sets | Hong Kong University Theses |
| Language | English |
| Detected Language | English |
| Type | PG_Thesis |
| Source | http://hub.hku.hk/bib/B48199357 |
| Rights | The author retains all proprietary rights, (such as patent rights) and the right to use in future works., Creative Commons: Attribution 3.0 Hong Kong License |
| Relation | HKU Theses Online (HKUTO) |
Page generated in 0.0021 seconds