International Journal of Financial Markets and Derivatives (7 papers in press)
The role of investor sentiment in the valuation of bitcoin and bitcoin derivatives
by Rebecca Abraham
Abstract: THE ROLE OF INVESTOR SENTIMENT IN THE VALUATION OF BITCOIN AND BITCOIN DERIVATIVES
Bitcoin is the currency of the blockchain, which promises cost reductions for businesses.This paper develops models to value bitcoin, bitcoin futures, and bitcoin options. It provides the theoretical basis for bitcoin pricing. Optimal bitcoin prices are derived at the intersection of an
aberrancy utility function,a hyperbolic cosine utility function, and a Bessel utility function with price distributions. Rational investors value bitcoin on the basis of blockchain applications, while irrational investors value bitcoin based on personal recommendations.
Asymmetric Laplace, investor sentiment, Kullback-Leibler, bitcoin, bitcoin futures, Levy, Khintchine, bitcoin options
JEL Classification: C54, F30
Keywords: Asymmetric Laplace; investor sentiment; Kullback-Leibler; bitcoin; bitcoin futures; Levy; Khintchine; bitcoin options.
Bitcoin\'s innovative aspects, return volatility and uncertainty shocks
by Bruno Frascaroli
Abstract: This paper investigates how Bitcoin\'s (BTC) return volatility is affected by its own innovative aspects, by the main global financial market indicators, and by shocks on volatility and uncertainty. The strategy was first estimate structural break tests to find significative regime switching in BTC returns. Next conditional volatility parameters are estimated from multivariate perspective using the DCC-MGARCH model. At this stage, the Standard & Poor 500 index, China\'s SSEC stock index and the price of gold were used to estimate the quasi-covariances and quasi-correlations matrices. In the last step it was also estimated impulse response functions to understand how BTC returns are affected by risk and uncertainty shocks coming from distinct sources. It was found that there are many factors and uncertainty surrounding the BTC market microstructure and indicators of a speculative bubble from the end of 2017 to mid-2018.
Keywords: Bitcoin; Innovation; Drivers; Return volatility; Uncertainty.
A Study of IPO Listing Returns in National Stock Exchange
by Rajkumar Sharma, Amit Chaudhary, Navneet Gera
Abstract: The goal of the study is to analyze the IPO listing returns in National Stock Exchange (NSE) and provide insights for retail investors. The study has considered a sample of 463 IPOs which were listed in National Stock Exchange (NSE) from January 2000 to August 2018. The mean listing return has been found to be 20.10 per cent which is abnormally high as compared to the mean market return which is 0.24. Also, it has been found that out of 463 IPOs selected for this study 66.74 per cent IPOs gave positive listing returns which means these IPOs were under priced. But we cannot generalize that all Indian IPOs are under priced because 33.26 per cent IPOs were found to be overpriced and gave negative listing returns. This study provides a base for retail investor (common man) to formulate investment strategy. This study shows that by subscribing for all IPOs (over a period of 18 years) and selling them on listing day, a retail investor could have easily earned about 99 per cent more returns as compared to market return and savings bank account return.
Keywords: Initial Public Offering (IPO); Listing Return; under pricing; under performance; Market Return; National Stock Exchange (NSE); Retail Investor.
The Valuation of Currency Call Options in Selected Target Zones: A Theoretical Formulation
by Rebecca Abraham
Abstract: This paper develops theoretical models to value call options on selected currencies found in target zones. The target zones include the Hong Kong dollar to US dollar fixed relationship, the unstable euro-Swiss franc peg from 2011-2015, and the temporarily stable Mexdollar to US dollar target zone. We ground our formulations in utility theory, drawing the distinction between risk averse investors and risk-takers. Accordingly, for each target zone, we state the optimal stochastic exchange rate, at the conjunction of the utility function and the stochastic exchange rate process (gamma distribution for the Hong Kong dollar, Bessel function for the Swiss franc, and Legendre function for the Mexdollar). Then, we value the call option at the solution of a linear programming model, which maximizes option returns subject to a utility function, and other exchange rate-specific constraints.
Keywords: currency call options; target zone; Green's theorem; utility theory; Bessel function; Legendre function; gamma distribution; aberrancy; exponential function; Hong Kong dollar; Swiss franc; Mexdollar.
Price Discovery and Volatility Spillovers in Commodity Market: A Review of Empirical Literature
by Neha Seth, Arpit Sidhu
Abstract: The purpose of this paper is to organize the present status of researches conducted on commodity market relationship, price discovery and volatility spillovers by reviewing the available literature. Other objectives of the present study are to classify the past studies under various categories, to provide an inclusive bibliography on the said topic and to evaluate the results of the studies taken into consideration by various researchers. Different sources were probed to review the past studies and out of thousands of paper, 130 research papers were considered, forming the sample for the present study. It was found that the research work on this topic has surged from 2010 to 2017, thus gaining consistently higher attention since then.
The present study will aid academicians, practitioners future researchers, policy makers and other relevant stakeholders in studying the existing research work, as well as in setting the directions for future research work related to same subject area and use of such data in any field that can be contribute in a resourceful manner.
Keywords: Commodity market; Derivative; Price discovery; Volatility spillover; Literature review.
Stress Test Techniques Using Drawdown Metrics: A Brazilian Case Study
by Arthur Geronazzo, João Luiz Chela
Abstract: The main objective of investors is to obtain the highest return, by running the lowest risk. On the other hand, risk managers are responsible for monitoring the risks. This paper presents a series of risk metrics based on Maximum Drawdown historical. Maximum Drawdown provides the information of the largest drop in the asset value that an investor can have in a given time interval. The metrics use historical simulation with different time intervals, Holding Period and confidence levels. The backtest of these metrics is done to verify adherence, so it shows that the Maximum Drawdown at Risk using GEV metric is the metric that presents the highest approval rates. The main contribution of this paper is the presentation of different risk metrics based on Maximum Drawdown, analyse of the best metric for each situation and applications of the metrics to risk management and stress scenarios.
Keywords: Maximum Drawdown; Risk Metrics; Stress Test; Extreme Value Theory; Maximum Drawdown at Risk; Conditional Expected Drawdown.
A Theory of 'Auction as a Search' in Speculative Markets
by Sudhanshu Pani
Abstract: The tatonnement process in high frequency order driven markets is modeled as a search by buyers for sellers and vice-versa. We propose a total order book model, comprising limit orders and latent orders, in the absence of a market maker. A zero intelligence approach of agents is employed using a diffusion-drift-reaction model, to explain the trading through continuous auctions (price and volume). The search
(levy or brownian) for transaction price is the primary diffusion mechanism with other behavioural dynamics in the model inspired from foraging, chemotaxis and robotic search. Analytic and asymptotic analysis is provided for several scenarios and examples. Numerical simulation of the model extends our understanding of the relative performance between brownian, superdiffusive and ballistic search in the model.
Keywords: Market Microstructure; Levy Search; Limit order markets; Continuous
Auctions; High Resolution; Zero Intelligence;.