Self excitation in equity indices

McClelland, Andrew James (2012) Self excitation in equity indices. PhD thesis, Queensland University of Technology.


A "self-exciting" market is one in which the probability of observing a crash increases in response to the occurrence of a crash. It essentially describes cases where the initial crash serves to weaken the system to some extent, making subsequent crashes more likely. This thesis investigates if equity markets possess this property. A self-exciting extension of the well-known jump-based Bates (1996) model is used as the workhorse model for this thesis, and a particle-filtering algorithm is used to facilitate estimation by means of maximum likelihood. The estimation method is developed so that option prices are easily included in the dataset, leading to higher quality estimates. Equilibrium arguments are used to price the risks associated with the time-varying crash probability, and in turn to motivate a risk-neutral system for use in option pricing. The option pricing function for the model is obtained via the application of widely-used Fourier techniques. An application to S&P500 index returns and a panel of S&P500 index option prices reveals evidence of self excitation.

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ID Code: 63629
Item Type: QUT Thesis (PhD)
Supervisor: Clements, Adam, Hurn, Stan, & Lindsay, Ken
Keywords: self exciting, option implied, transform-based option pricing, affine jump diffusion, market crash, particle filtering, nonlinear filtering, risk premia, parallelisation, graphics processing unit
Divisions: Current > QUT Faculties and Divisions > QUT Business School
Current > Schools > School of Economics & Finance
Institution: Queensland University of Technology
Deposited On: 22 Oct 2013 05:55
Last Modified: 09 Sep 2015 03:00

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