Issues in Derivatives Price Dynamics
type: CreativeWork
description: This thesis studies three interesting issues in derivatives pricing that have become increasingly important in light of the phenomenal growth in these markets. Researchers agree that deep out-of-money S&P 500 index put options experience large negative returns (e.g. Coval and Shumway, CS 2000). These stylized facts have, in turn, spawned two streams of literature that provide alternate explanations based on crash risk and buying pressure. In this study, we obtain data on all transactions on Treasury futures call and put options spanning a decade, and explore the nature of both realized and expected interest rate option returns. The use of treasury data in this setting allows us to separate out the impact of crash risk and buying pressure on option returns. We find that crash risk alone can not explain the extraordinary option returns. However, our findings are consistent with the buying pressure hypothesis. In the second paper, we study another important issue in derivatives pricing, i.e. whether conditions of scarcity impact futures risk premiums in commodity markets. Using a dataset of inventories to proxy for relative scarcity of the commodity, we find evidence that recent concerns about the impact of supply conditions upon risk premiums are justified. In particular, futures risk premiums generally increase during periods of scarcity when inventories are low. The interaction between inventories and futures risk premiums is both statistically and economically significant. Our evidence is important for subsequent theoretical research, as it points out that inventories relate to risk premiums in a manner distinct from that noted in prior research. The third paper studies two important refinements of Samuelson’s hypothesis. Samuelson (1965) gave theoretical arguments supporting the widely observed phenomenon that the term structure of volatility is downward sloping. We study iii Conditional versions of the Samuelson’s Hypothesis presented in Fama and French (1998) an…
abstract: This thesis studies three interesting issues in derivatives pricing that have become increasingly important in light of the phenomenal growth in these markets. Researchers agree that deep out-of-money S&P 500 index put options experience large negative returns (e.g. Coval and Shumway, CS 2000). These stylized facts have, in turn, spawned two streams of literature that provide alternate explanations based on crash risk and buying pressure. In this study, we obtain data on all transactions on Treasury futures call and put options spanning a decade, and explore the nature of both realized and expected interest rate option returns. The use of treasury data in this setting allows us to separate out the impact of crash risk and buying pressure on option returns. We find that crash risk alone can not explain the extraordinary option returns. However, our findings are consistent with the buying pressure hypothesis. In the second paper, we study another important issue in derivatives pricing, i.e. whether conditions of scarcity impact futures risk premiums in commodity markets. Using a dataset of inventories to proxy for relative scarcity of the commodity, we find evidence that recent concerns about the impact of supply conditions upon risk premiums are justified. In particular, futures risk premiums generally increase during periods of scarcity when inventories are low. The interaction between inventories and futures risk premiums is both statistically and economically significant. Our evidence is important for subsequent theoretical research, as it points out that inventories relate to risk premiums in a manner distinct from that noted in prior research. The third paper studies two important refinements of Samuelson’s hypothesis. Samuelson (1965) gave theoretical arguments supporting the widely observed phenomenon that the term structure of volatility is downward sloping. We study iii Conditional versions of the Samuelson’s Hypothesis presented in Fama and French (1998) an…
author: Khan, Saqib
language: en
keywords: Derivatives, Futures, Options, Risk premium, Volatility, Commodities, Scarcity, Hedging pressure
date published: 2007
date modified: 2026-07-27T21:56:20Z
provider: Western University
publisher: Networked Digital Library of Theses and Dissertations
type: WebPage
source organization: The University of Western Ontario

PropertyValue
property ID: Handle
value: https://hdl.handle.net/20.500.14721/39341