Macro-Financial Linkages and Perspectives in Economic Development
type: CreativeWork
description: This paper is a composition of three essays on topics dealing with financial market derivatives, macroeconomic policies using microdata, and the link between macroeconomics and international finance. All three chapters are a cohesive discussion on financial markets, investment analysis of financial derivatives, and economic impacts during COVID-19. We examine capital and resource allocation in a variety of cases across all three chapters: international capital flows on the largest domestically listed firms, investments in option contracts with low likelihoods of being exercised, and the role of domestic policy in distributing social welfare benefits during periods of economic downturns in India. The first chapter analyzes the predictive power of the Black-Scholes Merton (BSM) model by studying a large dataset of all traded options on the SPDR S&P 500 Trust ETF (SPY) from January 2005 to December 2020. Using each day’s complete option chain, we derive a measure to forecast the implied distribution of prices through N ( d 2 ), which we then compare to the realized distribution of SPY prices through the expiration of the option. With the goal of analyzing whether two different distributions come from the same underlying population distribution, we apply goodness of fit measures to assess the similarity of the risk-adjusted probabilities to an empirical distribution of prices. Two such measures include the Kolmogorov–Smirnov and Anderson-Darling tests; which we find to be useful in comparing our results. The resulting comparison gives way to visualizing and testing the ability for the BSM to predict the likelihood of options expiring in the-money. We find that the market expectations as backed out by the BSM tends to overestimate the tails in the implied probability distribution at longer expiration periods, compared to the empirical price path of SPY. The BSM, in most cases, correctly estimates the underlying risk adjusted probabilities only a few days out from expirat…
abstract: This paper is a composition of three essays on topics dealing with financial market derivatives, macroeconomic policies using microdata, and the link between macroeconomics and international finance. All three chapters are a cohesive discussion on financial markets, investment analysis of financial derivatives, and economic impacts during COVID-19. We examine capital and resource allocation in a variety of cases across all three chapters: international capital flows on the largest domestically listed firms, investments in option contracts with low likelihoods of being exercised, and the role of domestic policy in distributing social welfare benefits during periods of economic downturns in India. The first chapter analyzes the predictive power of the Black-Scholes Merton (BSM) model by studying a large dataset of all traded options on the SPDR S&P 500 Trust ETF (SPY) from January 2005 to December 2020. Using each day’s complete option chain, we derive a measure to forecast the implied distribution of prices through N ( d 2 ), which we then compare to the realized distribution of SPY prices through the expiration of the option. With the goal of analyzing whether two different distributions come from the same underlying population distribution, we apply goodness of fit measures to assess the similarity of the risk-adjusted probabilities to an empirical distribution of prices. Two such measures include the Kolmogorov–Smirnov and Anderson-Darling tests; which we find to be useful in comparing our results. The resulting comparison gives way to visualizing and testing the ability for the BSM to predict the likelihood of options expiring in the-money. We find that the market expectations as backed out by the BSM tends to overestimate the tails in the implied probability distribution at longer expiration periods, compared to the empirical price path of SPY. The BSM, in most cases, correctly estimates the underlying risk adjusted probabilities only a few days out from expirat…
author: Khalil, Nasser
keywords: Capital Flows, Financial Economics, Financial Markets, International Finance, Macroeconomics, Stock Market Concentration, Economics
date published: 2024-01-01T08:00:00Z
date modified: 2026-07-24T01:40:36Z
provider: Claremont Graduate University
publisher: Networked Digital Library of Theses and Dissertations
type: WebPage
source organization: Claremont Graduate University