Date of Award
Doctor of Philosophy (PhD)
The purpose of this dessertation is to analyze three issues related to the pricing of derivative securities. The first issue deals with options pricing and stock return volatility. If stock return volatility is a stochastic process, as opposed to deterministic process, then the present form of commonly-used option pricing models is misspecified and arbitrage-based arguments are invalid. Since stochastic volatility option models are considerably more complex than their deterministic counterparts, it is essential to rule out all deterministic possibilities before accepting the necessity of stochastic models. The result of applying chaos methodology to over 62,000 intra-day implied volatility observations shows no evidence in support of the deterministic chaos hypothesis. These findings add support to the growing literature on preference-based stochastic volatility models and reject the notion of deterministic volatility. The second issue addressed herein is the pricing of PRIMEs and SCOREs. This paper argues that these derivative securities represent a successful financial innovation. Although PRIMEs and SCOREs are simply the repackaged cash flows of an underlying stock, evidence is found that market values of the combined derivatives are greater than those of the underlying stocks, thus confirming and updating the earlier findings of Jarrow and O'Hara (1989). The third issue adds additional evidence to the current controversy over lead-lag relationships between derivatives (options) and their underlying assets (stocks). It is hypothesized that heterogeneous security designs cause changes in market microstructures which, in turn, lead to informed trader preference for one vehicle over another. The results of this study support the findings of Stephan and Whaley (1990) that stocks lead options.
Brockman, Paul Douglas, "Three Essays on Derivative Securities." (1994). LSU Historical Dissertations and Theses. 5779.