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) and the speculative effect introduced by Harrison Hong (2000). Fama and French (1998) conjecture that the Samuelson’s hypothesis will hold at low inventory levels and that the term structure of volatility will be flat at high inventory levels. We use a hand- collected dataset of inventories from crude oil, natural gas, gold and copper markets, to show that the Conditional Samuelson’s Hypothesis holds. To our knowledge this is the first direct test of the hypothesis. Hong (2000) postulates that Samuelson effect will hold in markets where there is low information asymmetry and it may not hold in markets where information asymmetry is high. He develops an equilibrium model of competitive futures market in which investors trade both for the purpose of hedging and speculation based on their private information. As information asymmetry increases the speculative motive of informed investor’s increases and the uninformed investors then expect to suffer from adverse selection costs. We use data on Net Hedging Pressure as a proxy for information asymmetry and provide evidence for the proposed speculative effec
Derivatives, Futures, Options, Risk premium, Volatility, Commodities, Scarcity, Hedging pressure
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