Modeling illiquidity premium and bid-ask prices of the financial securities

Download
2016
Karimov, Azar
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. 

Suggestions

Early warning on stock market bubbles via ellipsoidal clustering and inverse problems
Kürüm, Efsun; Weber, Gerhard Wilhelm; İyigün, Cem; Department of Financial Mathematics (2014)
When a financial bubble bursts, not only a large number of people suffer directly in society, but it also affects the entire economy. Therefore, it is important to develop an early warning using mathematics-supported tools that aims at a detection of bubbles. We introduce a new method which approaches the bubble concept geometrically by determining and evaluating ellipsoids. In fact, we generate a volume-based index via minimum-volume covering ellipsoid clustering method, and in order to visualize these ell...
The Effect of margin changes on futures market volume and trading
Erken, Çiğdem; Danışoğlu, Seza; Department of Financial Mathematics (2016)
Margins are performance bonds that are designed to protect market participants and the market as a whole against investor default. Academic interest in analyzing margins started in the late 1960s and the number of studies increased parallel to the growth of the derivatives markets. Studies on margins mostly focus on optimal margin rules, regulations on margins and the impact of margin levels on trading activity. The aim of this study is to determine the impact of margin levels and margin changes on trading ...
Essays on empirical testing of financialization of commodities
Ordu, Beyza Mina; Oran, Adil; Department of Business Administration (2017)
Over the last decade commodity derivatives market experienced a significant influx of financial institutions, which is a phenomenon referred to as financialization of commodities. The main purpose of this thesis is to investigate whether financialization bolstered the connectedness between US stock and commodity markets. Connectedness can occur in forms of either spillover or co-movement and hence we analyze each form in two essays. In the first essay, we investigate volatility spillover between 25 commodit...
Information in the financial news: effect of market commentary on stock market performance
Giray, Aynur; Danışoğlu, Seza; Department of Business Administration (2012)
This paper studies the effect of investment sentiment on asset prices. A sentiment proxy is calculated by performing content analysis on the Wall Street Journal‘s "Heard on the Street‘ columns. This proxy is extracted by the principal component analysis of the word tags from the Harvard psychological dictionary that is used by the content analysis software General Inquirer. The relationship between stock prices, trading volume and the media sentiment proxy is estimated within the VAR context. Results sugges...
Credit Risk Market and the Recent Loan Profile in the Turkish Banking Sector
Özdemir, Özlem (2009-05-01)
Very little research has been done on the financial stability implications of credit risk transfer markets. In particular there is a paucity of work considering the interactions between the various credit risk transfer markets or instruments. Regarding credit derivatives, the small number of existing studies can be explained by a lack of quantitative data and by the brief history of the market" (Kiff et al., 2002, page 2). This paper tries to explain the development of credit risk transfer instruments and h...
Citation Formats
A. Karimov, “Modeling illiquidity premium and bid-ask prices of the financial securities,” Ph.D. - Doctoral Program, Middle East Technical University, 2016.