Investigation of Interest Rate Derivatives by Quantum Finance

Liang, Cui. 2008. Investigation of Interest Rate Derivatives by Quantum Finance. Doctoral Dissertation, NUS.

Interest rate derivatives are the largest derivatives market in the world. In order to price different interest rate derivatives, one needs to model the underlying forward interest rate. Quantum finance developed by Baaquie is a framework to model non-trivial correlations between forward interest rates with different maturities as a parsimonious alternative to the existing interest rate theories in finance, in particular to the HJM-model. Base on the Quantum Finance framework, we empirically studied the Cap and Floor pricing, unlike Black's formula, the Quantum Finance formula generates the market price to an accuracy better than 90%.Also for swaption, the perturbation expansion formula generates the prices to an accuracy of about 95% and matches all the trends of the market. We also give a efficient algorithm for pricing American option on interest rate based on lattice field theory model.

Read more

Exotic Interest Rate Options in Quantum Finance

Pan, Tang. 2010. Exotic Interest Rate Options in Quantum Finance. Doctoral Dissertation, NUS.

A major subject matter of this thesis is focused on studying the generalized forward interest rate model and the Libor Market Model in Quantum Finance. Compared to the stochastic interest rate models, the imperfectly correlated interest rates are modeling as a Gaussian field. The feature of the Gaussian field is that it contains much more information than the one-dimensional stochastic processes, which drive the entire evolution of interest rates in traditional financial theory. The simulation algorithm for modeling interest rates is extensively studied. Due to the complex structure of interest rate instruments, the approximate price only can be derived based on the perturbation expansion for small value of volatility. The comparison between simulation results and analytical formula is studied for many instruments and shows the flexible and potential of simulation method in pricing interest rate derivatives. In particular, it is shown that the simulation method provides a powerful tool in studying any kind of interest rate instruments without limitation. Another part of this thesis is studying the Constant Elasticity of Variance (CEV) process. A recursion equation of CEV process is developed and used to calibrate the value of beta, which is the key term in CEV model. The value of beta for market observed Equity Default Swaps (EDS) spreads is obtained and agrees with the recent studies. However, the results for Credit Default Swaps (CDS) show that the market observed CDS spreads have no sensitivity to the implied volatility, which cannot be explained by CEV process. It is suggested that the EDS spreads with low barriers are more attractive to the market compared to CDS spreads. In the third part, an unequal time Gaussian model is developed to calibrate the stock market data. The nontrivial Lagrangian is defined and the unequal time propagator is studied for fitting the correlation of different stocks on different time. Compared to modern portfolio theory, Gaussian model is more powerful in describing the behavior of unequal time correlation. Based on the nontrivial Lagrangian, Gaussian model is generally applicable to other liquid markets which have strong unequal time correlation.

Read more

Empirical Essays in Finance, Growth and Institution

Raj, Manoj. 2006. Empirical Essays in Finance, Growth and Institution. Doctoral Dissertation, NUS.

Thesis is a compilation of four essays looking at various current issues. In the first essay, using industry-level data on firms dependence on external finance and firm’s asset tangibility for 27 industries in 42 countries, it is found that economies with higher levels of financial development have higher export shares and trade balance in industries with more intangible assets. Second essay provides empirical evidence to support the hypothesis that the level of economic development matters in the estimation of the effect of the financial sector on industry growth. Third essay using sample of 1441 firms from 28 industries found that firms with smaller size and with business-relation with government are more likely to appoint retired directors in Japanese boardrooms. Fourth essay using 161 IPOs in Singapore Stock Exchange tests the hypothesis that IPO underpricing could be influenced by herd behavior which gets rationalized in the long run.

Read more

Two Essays On Stock Price Momentum

Wen, Hua. 2007. Two Essays On Stock Price Momentum. Doctoral Dissertation, NUS.

Essay 1: the study argue that the parallels between the evidence of momentum and synchronicity could be due to the effect of cross-sectional variation in expected returns, which may arise from both the risk and the investor’s psychology. The empirical test results show that the cross-sectional variation in risks contributes to the negative relation between synchronicity and momentum. Further, it is the industry-risk, as well as other omitted common-risks from the two-factor model, but not the market-risk, that contributes to momentum profits. Essay 2: This paper investigates the role of information efficiency in momentum in the emerging markets. It is interesting to note that the momentum strategy works particularly well among stocks with low analyst coverage, decreasing analyst coverage, and high forecast dispersion. The observed relation between analyst behaviors and momentum is unrelated to the analyst herding tendency, and it does not fully support the information uncertainty story.

Read more

Liquidity and Commonality in Emerging Markets

Yafeng, Qin. 2007. Liquidity and Commonality in Emerging Markets. Doctoral Dissertation, NUS.

This study investigates the extent to which liquidity of emerging market stocks co-moves with each other, and tries to explore the underlying mechanism that drives commonality in liquidity. The empirical results show that in emerging markets, commonality in liquidity is significantly higher than that in developed markets, and individual stock liquidity is more affected by fluctuations in market prices than by fluctuations in individual stock prices, suggesting that higher commonality in liquidity in emerging markets could be caused by higher co-variation in stock volatility and inventory risk. Consistent with this conjecture, commonality in liquidity is found to be positively related to co-movement in volatility. These findings reinforce the idea that liquidity commonality is related to market-wide factor. The study also documents that liquidity co-movement across emerging markets has a strong geographic component. The initial results do not support the presence of a global liquidity factor.

Read more

Financial Crisis and the Resolution of Financial Distress: Evidence from Malaysia and Thailand

Lin, Tan Wei. 2008. Financial Crisis and the Resolution of Financial Distress: Evidence from Malaysia and Thailand. Doctoral Dissertation, NUS.

The Asian Financial Crisis brought about widespread financial distress in both the corporate and banking sectors. Therefore, the efficiency of asset resolution policy would determine, in large part, the impact of the crisis on the economy as well as speed of economic recovery. Using a two- tier hierarchical framework which comprises of a regulator, banks and firms, lin examine how hidden information and moral hazard affect agents' behavior and thus, the regulator's policy choice. The study show that banks' tendency to rollover defaulted loans encourage firms' manager to dissipate assets. Therefore, if the regulator anticipates that banks are likely to rollover defaulted loans than invoking bankruptcy, the regulator, under certain conditions, should opt for a centralized approach. The study complement a theoretical model with empirical study and show that Malaysia, which opted for a centralized approach had larger improvement in real bank credit growth, NPL ratio and corporate performance as compared to Thailand, which opted for a decentralized approach till 2001.

Read more

Measuring Liquidity in Emerging Markets

Huiping, Zhang. 2011. Measuring Liquidity in Emerging Markets. Doctoral Dissertation, NUS.

This study propose a new liquidity measure, Illiq_Zero, which incorporates both the trading frequency and the price impact dimensions of liquidity. Based on the transaction-level data for 20 emerging markets from 1996 to 2007, Huiping conduct a comparison analysis on the new liquidity measure and the other existing liquidity proxies. The results indicate that the new liquidity measure shows the highest correlations with the liquidity benchmarks. The Amihud illiquidity ratio of absolute stock returns to trading volume and the Zeros measure defined as the proportion of zero return days within a month are moderately correlated with the liquidity benchmarks and their performance is related to the trading activeness of the market.

Read more