ZHANG, YANG (2018) Essays in Risk Management and Asset Pricing with High Frequency Option Panels. Doctoral thesis, Durham University.
|PDF - Accepted Version|
The thesis investigates the information gains from high frequency equity option data with applications in risk management and empirical asset pricing. Chapter 1 provides the background and motivation of the thesis and outlines the key contributions. Chapter 2 describes the high frequency equity option data in detail. Chapter 3 reviews the theoretical treatments for Recovery Theorem. I derive the formulas for extracting risk neutral central moments from option prices in Chapter 4.
In Chapter 5, I specify a perturbation theory on the recovered discount factor, pricing kernel, and the physical probability density. In Chapter 6, a fast and fully-identified sequential programming algorithm is built to apply the Recovery Theorem in practice with noisy market data. I document new empirical evidence on the recovered physical probability distributions and empirical pricing kernels extracted from both index and single-name equity options. Finally, I build a left tail index from the recovered physical probability densities for the S&P 500 index options and show that the left tail index can be used as an indicator of market downside risk.
In Chapter 7, I uniquely introduce the higher dimensional option-implied average correlations and provide the procedures for estimating the higher dimensional option-implied average correlations from high frequency option data. In Chapter 8, I construct a market average correlation factor by sorting stocks according to their risk exposures to the option-implied average correlations. I find that (a) the market average correlation factor largely enhances the model-fitting of existing risk-adjusted asset pricing models. (b) the market average correlation factor yields persistent positive risk premiums in cross-sectional stock returns that cannot be explained by other existing risk factors and firm characteristic variables. Chapter 9 concludes the thesis.
|Item Type:||Thesis (Doctoral)|
|Award:||Doctor of Philosophy|
|Faculty and Department:||Faculty of Social Sciences and Health > Economics, Finance and Business, School of|
|Copyright:||Copyright of this thesis is held by the author|
|Deposited On:||14 May 2018 11:06|