[PDF] Option Markets Return Predictability And Term Structure eBook

Author : Yanhui Zhao
Publisher :
Page : pages
File Size : 47,86 MB
Release : 2018
Category : Electronic dissertations
ISBN :

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This dissertation consists of three essays on eliciting information about underlying assets from the equity options markets, and improving our understanding of the term structure cost of equity. In the first essay, we find that high standard deviations of the volatility premium, of implied volatility innovations, and of the volatility term structure spread in equity options predict low underlying returns. This return predictability is not explained by the levels of these three variables, or by volatility of volatility, other known firm characteristics, or common risk factor models. We find support for interpreting the standard deviations of these option-based measures as forward-looking proxies of heterogeneous beliefs. In the second essay, we find that stocks with high risk-neutral skewness (RNS) exhibit abnormal performance driven by rebounds following poor performance. This behavior connects it to momentum crashes caused by reversal in past losers. In periods of post-recession rebounds and high market volatility when momentum crashes occur, a zero-investment high-low RNS portfolio has significant positive abnormal returns. The momentum anomaly is strongest (weakest) in stocks with the lowest (highest) RNS, consistent with the positive relationship of RNS to momentum crashes. These results hold controlling for trading frictions, other firm characteristics, and risk factors. We generalize our findings to all stocks by constructing an RNS factor-mimicking portfolio SKEW and find that a WML strategy that avoids high SKEW beta stocks has superior performance to the baseline and risk-managed WML strategies. In the third essay, we estimate the cost of equity capital term structure for the insurance industry as a whole, and several insurance sectors such as life/health and property/casualty. We use a vector autoregressive process to jointly model the dynamics of expected cash flows, beta, and the market risk premium. We obtain a closed form solution for the discount rate appropriate for each maturity. Our empirical analysis shows that for the insurance industry, the cost of equity based on our term structure model is on average nearly 299.6 basis points higher compared to the single period CAPM. This means that these insurers might overly invest if they rely on the single period CAPM.

Author : Jim Campasano
Publisher :
Page : 41 pages
File Size : 16,66 MB
Release : 2018
Category :
ISBN :

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I examine the predictability of equity implied volatility from the term structure, and find that forward volatility levels are biased predictors of future spot implied volatility. I construct options structures which proxy for forward volatility assets, and show that a long-short portfolio of forward volatility assets produce significantly profitable returns. As the construction of the trade is borne from a violation of an expectations hypothesis, the strategy is similar to the carry trade effected in foreign exchange and other assets. Unlike the returns to carry in foreign exchange and other assets, the forward volatility assets are not exposed to liquidity or volatility risks and negatively loads on market risk.

Author : Kin Keung Lai
Publisher : Routledge
Page : 113 pages
File Size : 20,20 MB
Release : 2013-09-11
Category : Business & Economics
ISBN : 1135006989

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This book provides different financial models based on options to predict underlying asset price and design the risk hedging strategies. Authors of the book have made theoretical innovation to these models to enable the models to be applicable to real market. The book also introduces risk management and hedging strategies based on different criterions. These strategies provide practical guide for real option trading. This book studies the classical stochastic volatility and deterministic volatility models. For the former, the classical Heston model is integrated with volatility term structure. The correlation of Heston model is considered to be variable. For the latter, the local volatility model is improved from experience of financial practice. The improved local volatility surface is then used for price forecasting. VaR and CVaR are employed as standard criterions for risk management. The options trading strategies are also designed combining different types of options and they have been proven to be profitable in real market. This book is a combination of theory and practice. Users will find the applications of these financial models in real market to be effective and efficient.

Author : Erik Vogt
Publisher :
Page : 61 pages
File Size : 21,35 MB
Release : 2014
Category :
ISBN :

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The illiquidity of long-maturity options has made it difficult to study the term structures of option spanning portfolios. This paper proposes a new estimation and inference framework for these option-implied term structures that addresses long-maturity illiquidity. By building a sieve estimator around the risk-neutral valuation equation, the framework theoretically justifies (fat-tailed) extrapolations beyond truncated strikes and between observed maturities while remaining nonparametric. New confidence intervals quantify the term structure estimation error. The framework is applied to estimating the term structure of the variance risk premium and finds that a short-run component dominates market excess return predictability.

Author : John C. Cox
Publisher : Prentice Hall
Page : 518 pages
File Size : 37,53 MB
Release : 1985
Category : Business & Economics
ISBN :

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Includes the first published detailed description of option exchange operations, the first published treatment using only elementary mathematics and the first step-by-step procedure for implementing the Black-Scholes formula in actual trading.

Author : Robert A. Meyers
Publisher : Springer Science & Business Media
Page : 919 pages
File Size : 50,24 MB
Release : 2010-11-03
Category : Business & Economics
ISBN : 1441977007

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Finance, Econometrics and System Dynamics presents an overview of the concepts and tools for analyzing complex systems in a wide range of fields. The text integrates complexity with deterministic equations and concepts from real world examples, and appeals to a broad audience.

Author : John Y. Campbell
Publisher : Princeton University Press
Page : 630 pages
File Size : 34,15 MB
Release : 2012-06-28
Category : Business & Economics
ISBN : 1400830214

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The past twenty years have seen an extraordinary growth in the use of quantitative methods in financial markets. Finance professionals now routinely use sophisticated statistical techniques in portfolio management, proprietary trading, risk management, financial consulting, and securities regulation. This graduate-level textbook is intended for PhD students, advanced MBA students, and industry professionals interested in the econometrics of financial modeling. The book covers the entire spectrum of empirical finance, including: the predictability of asset returns, tests of the Random Walk Hypothesis, the microstructure of securities markets, event analysis, the Capital Asset Pricing Model and the Arbitrage Pricing Theory, the term structure of interest rates, dynamic models of economic equilibrium, and nonlinear financial models such as ARCH, neural networks, statistical fractals, and chaos theory. Each chapter develops statistical techniques within the context of a particular financial application. This exciting new text contains a unique and accessible combination of theory and practice, bringing state-of-the-art statistical techniques to the forefront of financial applications. Each chapter also includes a discussion of recent empirical evidence, for example, the rejection of the Random Walk Hypothesis, as well as problems designed to help readers incorporate what they have read into their own applications.

Author : Ruey S. Tsay
Publisher : John Wiley & Sons
Page : 466 pages
File Size : 19,15 MB
Release : 2018-09-14
Category : Mathematics
ISBN : 1119264073

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A comprehensive resource that draws a balance between theory and applications of nonlinear time series analysis Nonlinear Time Series Analysis offers an important guide to both parametric and nonparametric methods, nonlinear state-space models, and Bayesian as well as classical approaches to nonlinear time series analysis. The authors—noted experts in the field—explore the advantages and limitations of the nonlinear models and methods and review the improvements upon linear time series models. The need for this book is based on the recent developments in nonlinear time series analysis, statistical learning, dynamic systems and advanced computational methods. Parametric and nonparametric methods and nonlinear and non-Gaussian state space models provide a much wider range of tools for time series analysis. In addition, advances in computing and data collection have made available large data sets and high-frequency data. These new data make it not only feasible, but also necessary to take into consideration the nonlinearity embedded in most real-world time series. This vital guide: • Offers research developed by leading scholars of time series analysis • Presents R commands making it possible to reproduce all the analyses included in the text • Contains real-world examples throughout the book • Recommends exercises to test understanding of material presented • Includes an instructor solutions manual and companion website Written for students, researchers, and practitioners who are interested in exploring nonlinearity in time series, Nonlinear Time Series Analysis offers a comprehensive text that explores the advantages and limitations of the nonlinear models and methods and demonstrates the improvements upon linear time series models.

Author : Pietro Veronesi
Publisher : John Wiley & Sons
Page : 630 pages
File Size : 35,29 MB
Release : 2016-04-04
Category : Business & Economics
ISBN : 1118709195

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A comprehensive guide to the current theories and methodologies intrinsic to fixed-income securities Written by well-known experts from a cross section of academia and finance, Handbook of Fixed-Income Securities features a compilation of the most up-to-date fixed-income securities techniques and methods. The book presents crucial topics of fixed income in an accessible and logical format. Emphasizing empirical research and real-life applications, the book explores a wide range of topics from the risk and return of fixed-income investments, to the impact of monetary policy on interest rates, to the post-crisis new regulatory landscape. Well organized to cover critical topics in fixed income, Handbook of Fixed-Income Securities is divided into eight main sections that feature: • An introduction to fixed-income markets such as Treasury bonds, inflation-protected securities, money markets, mortgage-backed securities, and the basic analytics that characterize them • Monetary policy and fixed-income markets, which highlight the recent empirical evidence on the central banks’ influence on interest rates, including the recent quantitative easing experiments • Interest rate risk measurement and management with a special focus on the most recent techniques and methodologies for asset-liability management under regulatory constraints • The predictability of bond returns with a critical discussion of the empirical evidence on time-varying bond risk premia, both in the United States and abroad, and their sources, such as liquidity and volatility • Advanced topics, with a focus on the most recent research on term structure models and econometrics, the dynamics of bond illiquidity, and the puzzling dynamics of stocks and bonds • Derivatives markets, including a detailed discussion of the new regulatory landscape after the financial crisis and an introduction to no-arbitrage derivatives pricing • Further topics on derivatives pricing that cover modern valuation techniques, such as Monte Carlo simulations, volatility surfaces, and no-arbitrage pricing with regulatory constraints • Corporate and sovereign bonds with a detailed discussion of the tools required to analyze default risk, the relevant empirical evidence, and a special focus on the recent sovereign crises A complete reference for practitioners in the fields of finance, business, applied statistics, econometrics, and engineering, Handbook of Fixed-Income Securities is also a useful supplementary textbook for graduate and MBA-level courses on fixed-income securities, risk management, volatility, bonds, derivatives, and financial markets. Pietro Veronesi, PhD, is Roman Family Professor of Finance at the University of Chicago Booth School of Business, where he teaches Masters and PhD-level courses in fixed income, risk management, and asset pricing. Published in leading academic journals and honored by numerous awards, his research focuses on stock and bond valuation, return predictability, bubbles and crashes, and the relation between asset prices and government policies.