Mean-Preserving-Spread Risk Aversion and The CAPM

This paper establishes conditions under which the classical CAPM holds in equilibrium. Our derivation uses simple arguments to clarify and extend results available in the literature. We show that if agents are risk averse in the sense of mean-preserving-spread (MPS) the CAPM will necessarily hold, along with two-fund separation. We derive this result without imposing any distributional assumptions on asset returns. The CAPM holds even when the market contains an infinite number of securities and when investors only hold finite portfolios. Our paper complements the results of Duffie(1988) who provided an derivation of the CAPM under some somewhat more technical assumptions. In addition we use simple arguments to prove the existence of equilibrium with MPS-risk-averse investors without assuming that the market is complete. Our proof does not require any additional restrictions on the asset returns, except that the co-variance matrix for the returns on the risky securities is non-singular

Temporal Price Relation between Stock and Option Markets and A Bias of Implied Volatility in Option Price

We show that if a particular temporal relation exists between the option and spot markets, the implied volatility in option prices can be biased depending on the level of the true volatility. The higher the true volatility, the more upward (downward) biased the implied volatility will be, if the option market leads (lags) the spot market. Using intraday data of the S&P 500 index options, we show that the option market leads the spot market at least in the sample. More importantly, the implied volatility is biased due to the lead-lag relationship, and the bias is more profound when the market is more volatile.published or submitted for publicationnot peer reviewe

An algorithm for computing options on the maximum or minimum of several assets / 1535

Includes bibliographical references (p. 17)

Fertility trends, excess mortality and the Great Irish Famine

The binding of this item renders some marginal text unreadable. A hard copy is available in UCD Library at GEN 330.08 IR/UNI2014-09-18 JG: Record reinstated from backup after damaged text_valu

DERIVATIVES, RISK MANAGEMENT AND FINANCIAL DISASTERS

This paper provides a brief introduction to derivative securities and discusses their role in providing efficient allocations of risk within an economic system. Derivatives can be used to increase exposure to particular types of risk. We discuss three recent prominent financial disasters which have been associated to some extent with derivatives usage. These cases concern the demise of Barings Bank, the bankruptcy of Orange County, California and the near collapse of Long Term Capital Management. We emphasize the common elements in each case. We draw on a framework due to David Emanuel to suggest that traditional performance metrics do a poor job of measuring performance of derivative strategies.Cet article constitue une introduction aux produits dérivés, comme garanties financières. L’auteur discute de leur rôle et de leur allocation dans le système économique. Les produits dérivés peuvent être utilisés pour accroître l’exposition à des types particuliers de risque. Il examine en particulier trois exemples déterminants de désastres financiers associés à l’utilisation des produits dérivés. Ces cas concernent la déconfiture de la banque Barings, la faillite du comté d’Orange en Californie et l’effondrement récent de la société de gestion Long Term Capital Management. L’auteur tente de mettre en évidence, à partir de ces divers cas, les éléments qui sont communs. Il dessine enfin une structure attribuable à David Emanuel suggérant que le système métrique traditionnel de performance génère un travail de piètre qualité lorsqu’il s’agit de mesurer la perfomance des stratégies liées aux produits dérivés

The Quality Option and Timing Option in Futures Contracts.

A method is developed for pricing the quality option in futures contracts where there are several deliverable assets. The interaction of the timing option and the quality option is examined. Numerical estimates are provided to illustrate the dependence of the quality option on the number of underlying assets. The magnitude of the timing option is examined in the case of two deliverable assets. Copyright 1989 by American Finance Association.