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Please use this identifier to cite or link to this item:
http://hdl.handle.net/1974/1238
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| Title: | Pricing, hedging and testing risky assets in financial markets |
| Authors: | Ren, Yu |
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| Keywords: | Interest rate options
Nonparametrics
State-price densities
HJ-distance |
| Issue Date: | 2008 |
| Series/Report no.: | Canadian theses |
| Abstract: | State price density (SPD) and stochastic discount factor (SDF) are important elements
in asset pricing. In this thesis, I first propose to use projection pursuit regression
(PPR) and local polynomial regression (LPR) to estimate the SPD of interest rates nonparametrically.
By using a similar approach, I also estimate the delta values in the interest rate options and discusses how to delta-hedge these options. Unlike SPD measured in a risk-neutral economy, SDF is implied by an asset pricing model. It displays which prices are reasonable given the returns in the current period. Hansen and Jagannathan (1997) develop the Hansen-Jagannathan distance (HJ-distance) to measure pricing errors produced by SDF. While the HJ-distance has several desirable properties, Ahn and Gadarowski (2004) find that the specification test based on the HJ-distance overrejects correct models too severely in commonly used sample size to provide a valid test. This thesis proposes to improve the finite sample properties of the HJ-distance test by applying the shrinkage method (Ledoit and Wolf, 2003) to compute its weighting matrix. |
| Description: | Thesis (Ph.D, Economics) -- Queen's University, 2008-06-19 00:00:55.996 |
| URI: | http://hdl.handle.net/1974/1238 |
| Appears in Collections: | Queen's Theses & Dissertations
Economics Graduate Theses
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