Three Essays on Asset Pricing

This dissertation consists of three essays that show derivatives contain valuable information about the underlying equity and commodity markets, and specifically about the risk premiums in these markets and investor preferences. In the first essay, I use an option-based approach to characterize idiosyncratic jump risk for a large number of firms over a twenty-year period. I find that idiosyncratic jump risk carries a significant negative risk premium. It correlates with certain firm characteristics and can explain part of the idiosyncratic volatility puzzle. Moreover, I show that the average idiosyncratic jump risk of individual firms represents a systematic risk factor that affects the cross-section of stock returns, even after controlling for the aggregate market jump risk. These results suggest that idiosyncratic jump risk has important asset pricing implications and is distinct from market jump risk. In the second essay, I model the impact of supply and demand on risk premiums in electricity futures in a no-arbitrage model, using daily data between 2003 and 2014. The model allows for unspanned economic risk which is captured by supply and demand variables, but not identified by the futures price. The model provides a satisfactory fit, allows for identification of risk premiums in electricity markets, and decomposes the risk premium into components associated with demand and supply. The spot risk premium and forward bias implied by the unspanned model are on average large and negative but exhibit large fluctuations. The risk premiums display strong seasonal patterns, are related to the variance and skewness of the electricity spot price, and help predict future changes in spot prices. The unspanned risk premium associated with supply is highly time-varying and constitutes the most important component of the total risk premium embedded in electricity futures. In the third essay, I propose a multi-commodity futures pricing model with both economic variables and pricing variables to study the co-movement between natural gas and electricity futures prices. The model can capture the price dynamics of both commodities and illustrates the economics behind the co-movement between these markets. I find both supply (natural gas inventory) and demand (temperature) variables affect the price dynamics in natural gas and electricity markets. The demand variable has a larger impact than the supply variable. On average, 20\% of the price co-movement between the two markets can be attributed to economic variables. Economic variables mainly affect the co-movement of prices through their effects on the risk premiums, and this effect is larger for futures with longer maturities.

Name thesis:degree_name

Doctor of Philosophy

Level thesis:degree_level

Doctoral

Discipline thesis:degree_discipline

Business Administration

Grantor

University of Houston

Year dc:date.issued

2018

Author dc:creator

• Li, Yu

Advisor dc:contributor.advisor

• Jacobs, Kris

Committee members dc:contributor.committeemember

• Pirrong, Craig
• Doshi, Hitesh
• Lu, Tong

• Asset Pricing

Statement dc:rights

• The author of this work is the copyright owner. UH Libraries and the Texas Digital Library have their permission to store and provide access to this work. Further transmission, reproduction, or presentation of this work is prohibited except with permission of the author(s).

Language dc:language.iso

eng

Handle dc:identifier.uri

https://hdl.handle.net/10657/5484

OAI identifier oai:identifier

oai:uh-ir.tdl.org:10657/5484