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Postgraduate Thesis: Two essays on asset pricing
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TitleTwo essays on asset pricing
 
AuthorsLuo, Dan
罗丹
 
Issue Date2012
 
PublisherThe University of Hong Kong (Pokfulam, Hong Kong)
 
AbstractThis 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.
 
AdvisorsCarverhill, AP
 
DegreeDoctor of Philosophy
 
SubjectCapital assets pricing model.
 
Dept/ProgramEconomics and Finance
 
DC FieldValue
dc.contributor.advisorCarverhill, AP
 
dc.contributor.authorLuo, Dan
 
dc.contributor.author罗丹
 
dc.date.hkucongregation2012
 
dc.date.issued2012
 
dc.description.abstractThis 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.
 
dc.description.naturepublished_or_final_version
 
dc.description.thesisdisciplineEconomics and Finance
 
dc.description.thesisleveldoctoral
 
dc.description.thesisnameDoctor of Philosophy
 
dc.identifier.hkulb4819935
 
dc.languageeng
 
dc.publisherThe University of Hong Kong (Pokfulam, Hong Kong)
 
dc.relation.ispartofHKU Theses Online (HKUTO)
 
dc.rightsThe author retains all proprietary rights, (such as patent rights) and the right to use in future works.
 
dc.rightsCreative Commons: Attribution 3.0 Hong Kong License
 
dc.source.urihttp://hub.hku.hk/bib/B48199357
 
dc.subject.lcshCapital assets pricing model.
 
dc.titleTwo essays on asset pricing
 
dc.typePG_Thesis
 
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<item><contributor.advisor>Carverhill, AP</contributor.advisor>
<contributor.author>Luo, Dan</contributor.author>
<contributor.author>&#32599;&#20025;</contributor.author>
<date.issued>2012</date.issued>
<description.abstract>&#65279;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&amp;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&amp;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.</description.abstract>
<language>eng</language>
<publisher>The University of Hong Kong (Pokfulam, Hong Kong)</publisher>
<relation.ispartof>HKU Theses Online (HKUTO)</relation.ispartof>
<rights>The author retains all proprietary rights, (such as patent rights) and the right to use in future works.</rights>
<rights>Creative Commons: Attribution 3.0 Hong Kong License</rights>
<source.uri>http://hub.hku.hk/bib/B48199357</source.uri>
<subject.lcsh>Capital assets pricing model.</subject.lcsh>
<title>Two essays on asset pricing</title>
<type>PG_Thesis</type>
<identifier.hkul>b4819935</identifier.hkul>
<description.thesisname>Doctor of Philosophy</description.thesisname>
<description.thesislevel>doctoral</description.thesislevel>
<description.thesisdiscipline>Economics and Finance</description.thesisdiscipline>
<description.nature>published_or_final_version</description.nature>
<date.hkucongregation>2012</date.hkucongregation>
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