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1、DispersionTradinginGermanOptionMarketJonasLisauskasTilburgUniversityMasterThesisAbstractTherehasbeenanincreasingvarietyofvolatilityrelatedtradingstrategiesdevelopedsincethepublicationofBlack-Scholes-Mertonstudy.Inthispaperwestudyoneofdispersiontradingstrategies,whichattemptstopr
2、ofitfrommispricingoftheimpliedvolatilityoftheindexcomparedtoimpliedvolatilitiesofitsindividualconstituents.AlthoughtheprimarygoalofthisstudyistofindwhethertherewereanyprofitabletradingopportunitiesfromNovember3,2008throughMay10,2010intheGermanoptionmarket,itisalsointerestingtoch
3、eckwhetherbroadlydocumentedstylizedfactthatimpliedvolatilityoftheindexonaveragetendstobelargerthantheoreticalvolatilityoftheindexcalculatedusingimpliedvolatilitiesofitscomponents(Driessen,MaenhoutandVilkov(2006)andothers)stillholdsintimesofextremevolatilityandcorrelationthatweco
4、uldobserveinthestudyperiod.Alsowetouchtheissueofwhatis(orwas)causingthisdiscrepancy.1.Introduction.Thedispersiontradingstrategythatweexamineinthispaperattemptstoprofitfromtradingcalloptionsoftheindex(inthisoccasion,theGermanstockindexDAX30)andtheindexitselfagainstthecalloptionso
5、ftheindexconstituentsandthestocks.Theindexisaweightedaverageofstocks,therefore,itshouldbetheoreticallypossibletonearlyperfectlyhedgeapositionincalloptionsoftheindexwiththeopposingpositionsincalloptionsoftheshares(i.e.longindexcalloptionshouldbehedgedbyacombinationofshortindividu
6、alstocks’call1options).Sincetheabsolutevaluesofcalloptionsareincomparableduedifferentpricesoftheunderlyingasset(evenifallthoseoptionsareat-the-money,hence,thestrikepriceequalsthespotprice,havethesametimetomaturityandthecommoninterestrateasinthisoccasion),themethodologyofthestrat
7、egyapproachestheimpliedvolatilities,whicharereverseengineeredfromthequotedoptionprices,assumingthattheyaredeterminedbythefamousBlack-Scholesoptionspricingformula,ratherthanthevaluesofthederivativesthemselves.Onecould,therefore,expectthatsimilarlyastheindexisaweighedaverageofthes
8、hares,theimpliedvolatilityoftheindexisalsoaweig