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Essays in Financial Economics: Option Pricing, Behavioural Finance, Stochastic Terms in Modelling, and Relationships between Sectors within Stock Markets.

Mari, Konstantina (2017) Essays in Financial Economics: Option Pricing, Behavioural Finance, Stochastic Terms in Modelling, and Relationships between Sectors within Stock Markets. PhD thesis, University of York.

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Finance Theory is built mainly based on the assumption that investors are risk neutral. We run two finance experiments to test American option pricing theory. Dynamic programming and optimal stopping theory are used for the construction of the models. Simulation studies are conducted for the experiments. In the first experiment, we test a disinvestment case of real options theory in discrete time. Our results show that risk aversion explains better the decisions of the participants than risk neutrality as few of the participants appeared to be risk neutral. Furthermore, risk aversion explains better the behaviour of the subjects than myopic behaviour. In the second experiment, we examine the timing of the exercising of an American call option contract in continuous time. We estimate the risk aversion parameters of the subjects from the main experiment, and we elicit their risk aversion parameters by running another small experiment with allocation questions. Based on these parameters we find the estimated and the elicited risk averse optimal trigger respectively. From our analysis we show that the estimated risk averse optimal trigger explains better the actual stopping decisions of the subjects, while the risk neutral optimal trigger has the next highest explanatory power and the elicited risk optimal trigger the lowest. The third project tests the stochastic assumptions underlying an analysis by examining the statistical properties of the estimated parameters and comparing them to the actual values. This study shows that the stochastic specification underlying any analysis matters for the interpretation of its results. In the last project, we check the interdependency relationships among the five major market sectors of Greece, Italy and Portugal. By using dependency tests, such as Johansen cointegration and Granger causality tests, we find that the Greek sectors provide some diversification benefits for sector-level investments, while the opposite is true for the Italian sectors. Only in the case of Portugal do the results suggest non-existence of interdependency relationships among the sectors for the first sub-period of the total period we examine and their existence later. Moreover, by using the variance decomposition and the time-varying volatility methodologies we conclude that for all the three countries the majority of the sectors are exogenous and their volatility is highly increased due to crisis, particularly in the case of the Financials sector.

Item Type: Thesis (PhD)
Academic Units: The University of York > Economics and Related Studies (York)
Depositing User: Konstantina Mari
Date Deposited: 06 Jun 2017 11:07
Last Modified: 06 Jun 2017 11:07
URI: http://etheses.whiterose.ac.uk/id/eprint/17419

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