Herd behavior index for bespoke baskets: approximation via convex ordering

In this thesis we investigate the problem of measuring dependence between stock prices only based on today's vanilla options by applying the Herd Behavior Index in bespoke baskets. The HIX is a measure of implied degree of co-movement of stocks over a given time and could be used to indicate the level of positive dependence between stocks. The calculation of the HIX requires the market data of option on each component stock and option on the basket. However, for bespoke baskets, there are only vanilla options but not basket options traded in the market. Hence, in order to calculate its HIX, we need an approach for efficient basket option pricing. In the multivariate Variance Gamma model framework, we price the bespoke basket option via convex order and comonotonic approximations which serve the purpose. We then calibrate two customized baskets using market data from 2007 to 2011. The resulting HIX indicates potential hedging possibility even during the financial crisis when most stocks are expected to move down at the same time.

Name thesis:degree_name

M.S.

Level thesis:degree_level

Thesis

Discipline thesis:degree_discipline

Actuarial Science

Grantor

University of Illinois at Urbana-Champaign

Year dc:date

2021

Author dc:creator

• Li, Churui

Contributors dc:contributor

• Linders, Daniël
• Chong, Alfred

• implied dependence, comonotonicity, multivariate modeling, calibration

Statement dc:rights

• Copyright 2021 Churui Li

Language dc:language

en

Handle dc:identifier

http://hdl.handle.net/2142/110598

OAI identifier oai:identifier

oai:www.ideals.illinois.edu:2142/110598