Date

2016

Author

Karimov, Azar

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When a financial bubble bursts, this affects the entire economy. Therefore, it is important to recognize bubbles as early as possible. In this thesis, we introduce a new approach to identify stock market bubbles by using illiquidity premium derived by employing Conic Finance theory. This theory is connected with liquidity effects and risk behavior of money markets. In financial markets, liquidity is an important quantity since it mirrors the asset's capability to be bought or sold without a significant change in the price and with a smallest possible loss of value. During financial shocks, the liquidity is said to evaporate and, hence, it increases the bid-ask spread of financial securities. Therefore, illiquidity premium has been thought as a kind of indicator to detect bubbles. In this thesis, we derive the closed form formulas of the bid and ask prices of the European options by using the Black-Scholes and Kou models. Moreover, by using the derived formulas we numerically calculate the illiquidity premiums of the option contracts. We deal with 2008 subprime crisis in equity markets by using derivative contracts and use data of European put and call options written on S&P 500 index taken from the years of 2008 to 2010. Moreover, in order to monitor the market movements closely, we use sliding windows technique. As a result, we have found a sharply increasing process in illiquidity premium that is obtained from the derivatives market, when the bubble-burst time approaches in a stock market. The thesis ends with a conclusion and an outlook to future investigations. 

Subject Keywords

Finance., Securities., Stock exchanges., Derivative securities.

URI

http://etd.lib.metu.edu.tr/upload/12620652/index.pdf
https://hdl.handle.net/11511/26193

Collections

Graduate School of Applied Mathematics, Thesis