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UBC Theses and Dissertations

Two essays in empirical asset pricing Ruf, Thomas


In the first essay, I empirically investigate the effect of financial frictions and exogenous demand pressure on both prices and returns of options. Historically, observed option returns have been a challenge for no-arbitrage asset pricing models, most notably in the case of out-of-the-money equity index puts. I propose that liquidation risk, defined as the possibility of forced selling of speculative positions following a liquidity shock, is a major driver of the relative price of out-of-the-money put vs. call options (option-implied skewness) in commodity futures options markets and gives rise to a skewness risk premium in option returns. Establishing speculative net long positions in options (OSP) as a key proxy for liquidation risk, I find that the skewness risk premium rises (falls), but realized skewness remains unchanged, when OSP is more positive (negative). I also provide direct evidence of the price effects during such liquidation events. Trading strategies designed to theoretically exploit the skewness premium yield up to 2.5 percent per month and load significantly on risk factors related to the ease of funding for financial intermediaries. In the second essay, I investigate the pricing dynamics of a class of option-like structured products, bank-issued warrants, using a large, high-frequency data set. I provide evidence that issuers extract rents from investors due to 2 key features of these markets: Each issuer is the sole liquidity provider in the secondary market for her products, and short-selling is not possible. As a consequence, I find that warrants are more overpriced the harder they are to value, and the fewer substitutes are available. Second, issuers are able to anticipate demand in the short term and preemptively adjust prices for warrants upwards (downwards) on days when investors are net buyers (sellers). Third, issuers decrease the amount of overpricing over the lifetime of most warrants, lowering returns for investors further. Lastly, while I find a negative relationship between issuer credit risk and overpricing, the effect is generally too small, is absent prior to the Lehman Brothers bankruptcy and does not conform to models of vulnerable options.

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