Pricing Vulnerable Options in Incomplete Markets

• Main Authors: Yuhong Liu, 劉裕宏
• Other Authors: Mao-wei Hung
• Format: Others
• Language: en_US
• Published: 2003
• Online Access: http://ndltd.ncl.edu.tw/handle/10269999449922386448

博士 === 國立臺灣大學 === 國際企業學研究所 === 91 === THESIS ABSTRACT GRADUATE INSTITUTE OF INTERNATIONAL BUSINESS NATIONAL TAIWAN UNIVERSITY NAME：YUHONG LIU MONTH / YEAR：JUNE, 2003 This thesis has two main parts. The first constructs a model and derives a formula for pricing a vulnerable option when the market is incomplete. The second concerns an empirical application. In the first, the pricing formula for a vulnerable option in Klein (1996), which works only under the assumption of a complete market, is extended to perform well when the market is incomplete. The motivation for our extension of Klein (1996)’s model is that most underlying assets of the vulnerable options are usually non-traded or thinly traded. Pricing a vulnerable option under the assumption of market incompleteness is more reasonable. The second part of this thesis describes a new data segmentation method and employs the Markov-switching method to investigate the spillover effect between the world market and the markets of individual countries. In addition to the effect of volatility, this paper also investigates the influence of market sentiment on the correlation between the world market and the markets of individual countries. A more active investment strategy is proposed when the market are influenced by both volatility and market sentiment. The empirical results reveal that the effect of market sentiment cannot be neglected when a more efficient portfolio is to be constructed.