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dc.contributor.author
Ulmann, Florian Michael Till
dc.contributor.supervisor
Sornette, Didier
dc.contributor.supervisor
Battiston, Stefano
dc.date.accessioned
2023-01-27T12:40:14Z
dc.date.available
2022-01-16T17:38:00Z
dc.date.available
2022-01-16T18:14:03Z
dc.date.available
2023-01-27T12:40:14Z
dc.date.issued
2021
dc.identifier.uri
http://hdl.handle.net/20.500.11850/526014
dc.identifier.doi
10.3929/ethz-b-000526014
dc.description.abstract
This dissertation is a compilation of four self-contained research papers that contribute to the literature of financial economics. All papers are co-authored by Professor Didier Sornette, my thesis supervisor, and further, depending on the project, by other authors. While three papers presented in this thesis were submitted to leading, peer-reviewed journals and are either awaiting review or are on revise and resubmit status, one paper is work in progress (the respective status is shown in the references as well as on the paper title page). The papers as presented in the thesis can include additional material that goes beyond the versions submitted. Understanding the formation and dynamics of asset prices is essential for many regulatory, policy and investment decisions. Chapter 2 and 3 of this dissertation aim to cast light into the dynamics of asset prices in the presence of two feedback effects, option markets and circuit breakers, using relative pricing models. Chapter 4 presents an absolute asset pricing model that provides a framework on how to correctly value firms in the presence of high clash flow growth. First, chapter 2 presents the discussion of a feedback effect between markets, namely from the options market onto the underlying’s market. We show that if the option market makers (OMM) hedge a larger share of their position compared to option market takers (OMT), this leads to a net delta hedge demand in the spot market. And due to liquidity effects (price impact), this mechanically leads to an increase or decrease in the underlying’s price volatility and a distortion of the underlying’s drift, depending on the positioning of the option market. We describe this dynamic with a relative pricing model, relative to the price without option hedging. Then we focus on the impact of option hedging on the spot markets volatility in the foreign exchange (FX) market. We use trade repository data to estimate the net positioning of the OMM in the FX options market and with it her delta hedge demand in the spot market. We find the OMM to be short gamma on average (implying she has a short option positioning on average) and thus the volatility to be increased by delta hedging of the OMM. Next, we an- alyze the impact of option hedging on the price stability. Using theoretical arguments as well as simulations, we show that the probability for drift bursts, i.e. explosive directional price moves, can be increased or decreased due to option positioning, depending on the option parameters and delta of the OMM. Using option positioning data for the GameStock stock, we document that there are indeed instances where explosive trends due to hedging were more likely in the first quarter of 2021, during which the stock showed exceptional price instability. Second, chapter 3 presents the discussion of a feedback effect that stems from the market architecture of exchanges, i.e. the price dynamics of so called circuit breakers (CB). A price-based CB for example is a trading halt imposed by an exchange after the price drops below (or rises above) a pre-specified value within a trading session. The rational behind a CB mechanism is that it gives traders time to calm down, interact with their counterparts and rethink their trading decision. Given that investors are continuously forming anticipations, their tactical positioning in the presence of the CB may lead to feedback of the CB on the price itself. We model the price dynamic under a CB using a relative pricing model, relative to the price without a CB, in a closed-form setup, in which the investors’ anticipation of the probability of a halt feedbacks on the price. In a general stochastic financial framework, this leads to coupled integral and stochastic differential equations. Our theory confirms two observations of this field for price-based CBs, namely an increased price volatility prior to the trigger and a negative effect of attracting the price to the CB level (known as the magnet effect). As our framework generalises to other CB mechanisms, we can then suggest a new CB design which minimises the adverse effects of a price-based CB. We e.g. show that a trading halt that is conditioned on a pre-specified volatility level, instead of a price level, mitigates the side effects. Third, chapter 4 contributes to the discipline of absolute asset pricing. We aim to refocus the discussion around what could be loosely referred to as an expected return factor. Motivated by economic intuition and empirical insights from the consumption-based capital asset pricing model we show that the expected return on a firm level has a linear relationship to the firm’s cash flow growth level. With that we argue that the discount rate should reflect this linear relationship and should thus have the same term structure as the assumed cash flow growth rate process. Based on that we first introduce a discounted cash flow (CDF) model with a time-varying discount rate matching the assumed cash flow growth rate process. This important feature greatly enhances the value of a DCF model, as the valuation is less sensitive to the cash flow growth rate process assumptions, as the discount rate is proportional to the assumed cash flow growth rate term structure, such that these two naturally complementary variables interact to massively reduce the range of reasonable valuation outcomes. Second, using the same time-varying discount rate in an internal cost of capital (ICC) model, we elaborate that the corresponding time-varying internal rate of return allows for a straightforward interpretation as investment return of a buy and hold strategy, compared to e.g. a constant ICC model, which by construction is a constant compound return. We show that our expected return proxy is superior in explaining realised returns compared to a constant internal rate of return, and even renders well known linear factors, which can be motivated from theory, insignificant. Last, the economic significance is confirmed in a trading strategy with yearly rebalancing.
en_US
dc.format
application/pdf
en_US
dc.language.iso
en
en_US
dc.publisher
ETH Zurich
en_US
dc.rights.uri
http://rightsstatements.org/page/InC-NC/1.0/
dc.subject
Valuation
en_US
dc.subject
OPTIONS (FINANCE)
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dc.subject
Hedging
en_US
dc.subject
Price impact
en_US
dc.subject
CASH FLOW (ACCOUNTING)
en_US
dc.subject
Circuit Breaker
en_US
dc.subject
Mathematical Finance
en_US
dc.subject
ECONOMICS
en_US
dc.subject
FINANCE
en_US
dc.subject
Expected Returns
en_US
dc.subject
Cost of capital
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dc.subject
Discounted cash flow method
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dc.subject
Discounted cash flow
en_US
dc.subject
investing in stocks
en_US
dc.subject
Trading strategy
en_US
dc.subject
Stock returns
en_US
dc.title
Understanding Asset Price Dynamics in the Presence of Option Hedging, Circuit Breakers and Cash Flow Growth
en_US
dc.type
Doctoral Thesis
dc.rights.license
In Copyright - Non-Commercial Use Permitted
dc.date.published
2022-01-16
ethz.size
167 p.
en_US
ethz.code.ddc
DDC - DDC::3 - Social sciences::330 - Economics
en_US
ethz.code.ddc
DDC - DDC::0 - Computer science, information & general works::004 - Data processing, computer science
en_US
ethz.code.ddc
DDC - DDC::6 - Technology, medicine and applied sciences::650 - Management & auxiliary services
en_US
ethz.code.ddc
DDC - DDC::5 - Science::510 - Mathematics
en_US
ethz.code.jel
JEL - JEL::G - Financial Economics::G0 - General::G00 - General
en_US
ethz.code.jel
JEL - JEL::F - International Economics::F3 - International Finance
en_US
ethz.code.jel
JEL - JEL::F - International Economics::F0 - General
en_US
ethz.code.jel
JEL - JEL::C - Mathematical and Quantitative Methods::C1 - Econometric and Statistical Methods and Methodology: General
en_US
ethz.code.jel
JEL - JEL::C - Mathematical and Quantitative Methods::C5 - Econometric Modeling
en_US
ethz.code.jel
JEL - JEL::C - Mathematical and Quantitative Methods::C8 - Data Collection and Data Estimation Methodology; Computer Programs
en_US
ethz.code.jel
JEL - JEL::C - Mathematical and Quantitative Methods::C6 - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
en_US
ethz.code.jel
JEL - JEL::G - Financial Economics::G2 - Financial Institutions and Services
en_US
ethz.code.jel
JEL - JEL::G - Financial Economics::G1 - General Financial Markets
en_US
ethz.code.jel
JEL - JEL::G - Financial Economics::G3 - Corporate Finance and Governance::G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
en_US
ethz.code.jel
JEL - JEL::G - Financial Economics::G3 - Corporate Finance and Governance::G31 - Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
en_US
ethz.code.jel
JEL - JEL::G - Financial Economics::G3 - Corporate Finance and Governance
en_US
ethz.code.jel
JEL - JEL::G - Financial Economics::G1 - General Financial Markets::G17 - Financial Forecasting and Simulation
en_US
ethz.code.jel
JEL - JEL::G - Financial Economics::G1 - General Financial Markets::G12 - Asset Pricing; Trading Volume; Bond Interest Rates
en_US
ethz.code.jel
JEL - JEL::G - Financial Economics::G1 - General Financial Markets::G11 - Portfolio Choice; Investment Decisions
en_US
ethz.code.jel
JEL - JEL::F - International Economics::F3 - International Finance::F31 - Foreign Exchange
en_US
ethz.code.jel
JEL - JEL::F - International Economics::F3 - International Finance::F37 - International Finance Forecasting and Simulation: Models and Applications
en_US
ethz.code.jel
JEL - JEL::E - Macroeconomics and Monetary Economics::E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit::E52 - Monetary Policy
en_US
ethz.code.jel
JEL - JEL::E - Macroeconomics and Monetary Economics::E0 - General::E00 - General
en_US
ethz.code.jel
JEL - JEL::G - Financial Economics::G1 - General Financial Markets::G15 - International Financial Markets
en_US
ethz.code.jel
JEL - JEL::G - Financial Economics::G1 - General Financial Markets::G15 - International Financial Markets
en_US
ethz.identifier.diss
27982
en_US
ethz.publication.place
Zurich
en_US
ethz.publication.status
published
en_US
ethz.leitzahl
ETH Zürich::00002 - ETH Zürich::00012 - Lehre und Forschung::00007 - Departemente::02120 - Dep. Management, Technologie und Ökon. / Dep. of Management, Technology, and Ec.::03738 - Sornette, Didier (emeritus) / Sornette, Didier (emeritus)
en_US
ethz.date.deposited
2022-01-16T17:38:05Z
ethz.source
FORM
ethz.eth
yes
en_US
ethz.availability
Open access
en_US
ethz.date.embargoend
2023-01-16
ethz.rosetta.installDate
2022-01-16T18:14:09Z
ethz.rosetta.lastUpdated
2023-02-07T10:06:50Z
ethz.rosetta.versionExported
true
ethz.COinS
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