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Title:Herd behavior index for bespoke baskets: approximation via convex ordering
Author(s):Li, Churui
Advisor(s):Linders, Daniël; Chong, Alfred
Department / Program:Mathematics
Discipline:Actuarial Science
Degree Granting Institution:University of Illinois at Urbana-Champaign
Subject(s):implied dependence, comonotonicity, multivariate modeling, calibration
Abstract: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.
Issue Date:2021-04-30
Rights Information:Copyright 2021 Churui Li
Date Available in IDEALS:2021-09-17
Date Deposited:2021-05

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