infonet-economy

A new method to retrieve the risk-neutral probability measure from observed option prices is developed and a closed form pricing formula for European options is obtained by employing a modified Gram-Charlier series expansion, known as the Gauss-Hermite expansion. This expansion converges for fat-tailed distributions commonly encountered in the study of financial returns. The…

We analyze the impact of foreign bank presence on foreign direct investment in China. Our estimates demonstrate that foreign direct investment across regions in China is increasing in the existing network of regional branches of foreign banks, which itself is driven (and therefore instrumented) by the timing of the regional phasing out of the local limits for foreign banks on local…

We present results from a large-scale international survey on risk preferences conducted in 53 countries. In all countries, we find, on average, an attitude of risk aversion in gains and of risk seeking in losses. The degree of risk aversion shows significant cross-country differences. Moreover, risk attitudes in our sample depend not only on economic conditions but also on cultural…

Given a theoretical pricing model, an implied volatility can be extracted from an option’s market price. Given a set of options with the same maturity and a range of strike prices, it is possible to extract (an approximation to) the entire risk-neutral probability density without having to assume a theoretical pricing model. There are a variety of related methods to do this, but all…

This thesis considers two main subjects divided in four problems in the broad field of mathematical finance. The first chapter treats option pricing followed by three chapters on the application of the machine learning algorithm of Random Forests to finance, specifically to risk capital aggregation, portfolio optimization and macro stress testing. In all four chapters new…

An overwhelmingly large number of research studies in corporate Finance span the basis formed by chiefly three corporate policies - Financial policy (leverage), dividend policy, and investment policy. The two most oft-cited frictions, agency issues and asymmetric information, add complexities to the nexus formed by the policies. My empirical dissertation, "Three essays in real…