Three essays on asset pricing

In this dissertation, I investigate three related topics on asset pricing: the consumption-based asset pricing under long-run risks and fat tails, the pricing of VIX (CBOE Volatility Index) options and the market price of risk embedded in stock returns and stock options. These three topics are fully explored in Chapter II through IV. Chapter V summarizes the main conclusions. In Chapter II, I explore the effects of fat tails on the equilibrium implications of the long run risks model of asset pricing by introducing innovations with dampened power law to consumption and dividends growth processes. I estimate the structural parameters of the proposed model by maximum likelihood. I find that the stochastic volatility model with fat tails can, without resorting to high risk aversion, generate implied risk premium, expected risk free rate and their volatilities comparable to the magnitudes observed in data. In Chapter III, I examine the pricing performance of VIX option models. The contention that simpler-is-better is supported by the empirical evidence using actual VIX option market data. I find that no model has small pricing errors over the entire range of strike prices and times to expiration. In general, Whaley’s Black-like option model produces the best overall results, supporting the simpler-is-better contention. However, the Whaley model does under/overprice out-of-the-money call/put VIX options, which is contrary to the behavior of stock index option pricing models. In Chapter IV, I explore risk pricing through a model of time-changed Lvy processes based on the joint evidence from individual stock options and underlying stocks. I specify a pricing kernel that prices idiosyncratic and systematic risks. This approach to examining risk premia on stocks deviates from existing studies. The empirical results show that the market pays positive premia for idiosyncratic and market jump-diffusion risk, and idiosyncratic volatility risk. However, there is no consensus on the premium for market volatility risk. It can be positive or negative. The positive premium on idiosyncratic risk runs contrary to the implications of traditional capital asset pricing theory.

Three Essays on Asset Pricing

In this dissertation, I investigate three related topics on asset pricing: the consumption-based asset pricing under long-run risks and fat tails, the pricing of VIX (CBOE Volatility Index) options and the market price of risk embedded in stock returns and stock options. These three topics are fully explored in Chapter II through IV. Chapter V summarizes the main conclusions. In Chapter II, I explore the effects of fat tails on the equilibrium implications of the long run risks model of asset pricing by introducing innovations with dampened power law to consumption and dividends growth processes. I estimate the structural parameters of the proposed model by maximum likelihood. I find that the stochastic volatility model with fat tails can, without resorting to high risk aversion, generate implied risk premium, expected risk free rate and their volatilities comparable to the magnitudes observed in data. In Chapter III, I examine the pricing performance of VIX option models. The contention that simpler-is-better is supported by the empirical evidence using actual VIX option market data. I find that no model has small pricing errors over the entire range of strike prices and times to expiration. In general, Whaley’s Black-like option model produces the best overall results, supporting the simpler-is-better contention. However, the Whaley model does under/overprice out-of-the-money call/put VIX options, which is contrary to the behavior of stock index option pricing models. In Chapter IV, I explore risk pricing through a model of time-changed Lévy processes based on the joint evidence from individual stock options and underlying stocks. I specify a pricing kernel that prices idiosyncratic and systematic risks. This approach to examining risk premia on stocks deviates from existing studies. The empirical results show that the market pays positive premia for idiosyncratic and market jump-diffusion risk, and idiosyncratic volatility risk. However, there is no consensus on the premium for market volatility risk. It can be positive or negative. The positive premium on idiosyncratic risk runs contrary to the implications of traditional capital asset pricing theory.

Soot measurements in steady and pulsed ethylene/air diffusion flames using Laser-Induced Incandescence

Combustion-generated carbon black nano particles, or soot, have both positive and negative effects depending on the application. From a positive point of view, it is used as a reinforcing agent in tires, black pigment in inks, and surface coatings. From a negative point of view, it affects performance and durability of many combustion systems, it is a major contributor of global warming, and it is linked to respiratory illness and cancer. Laser-Induced Incandescence (LII) was used in this study to measure soot volume fractions in four steady and twenty-eight pulsed ethylene diffusion flames burning at atmospheric pressure. A laminar coflow diffusion burner combined with a very-high-speed solenoid valve and control circuit provided unsteady flows by forcing the fuel flow with frequencies between 10 Hz and 200 Hz. Periodic flame oscillations were captured by two-dimensional phase-locked LII images and broadband luminosity images for eight phases (0° – 360°) covering each period. A comparison between the steady and pulsed flames and the effect of the pulsation frequency on soot volume fraction in the flame region and the post flame region are presented. The most significant effect of pulsing frequency was observed at 10 Hz. At this frequency, the flame with the lowest mean flow rate had 1.77 times enhancement in peak soot volume fraction and 1.2 times enhancement in total soot volume fraction; whereas the flame with the highest mean flow rate had no significant change in the peak soot volume fraction and 1.4 times reduction in the total soot volume fraction. A correlation (fvRe-1 = a + b·Str) for the total soot volume fraction in the flame region for the unsteady laminar ethylene flames was obtained for the pulsation frequency between 10 Hz and 200 Hz, and the Reynolds number between 37 and 55. The soot primary particle size in steady and unsteady flames was measured using the Time-Resolved Laser-Induced Incandescence (TIRE-LII) and the double-exponential fit method. At maximum frequency (200 Hz), the soot particles were smaller in size by 15% compared to the steady case in the flame with the highest mean flow rate.

Soot Measurements in Steady and Pulsed Ethylene/Air Diffusion Flames Using Laser-Induced Incandescence

Combustion-generated carbon black nano particles, or soot, have both positive and negative effects depending on the application. From a positive point of view, it is used as a reinforcing agent in tires, black pigment in inks, and surface coatings. From a negative point of view, it affects performance and durability of many combustion systems, it is a major contributor of global warming, and it is linked to respiratory illness and cancer. Laser-Induced Incandescence (LII) was used in this study to measure soot volume fractions in four steady and twenty-eight pulsed ethylene diffusion flames burning at atmospheric pressure. A laminar coflow diffusion burner combined with a very-high-speed solenoid valve and control circuit provided unsteady flows by forcing the fuel flow with frequencies between 10 Hz and 200 Hz. Periodic flame oscillations were captured by two-dimensional phase-locked LII images and broadband luminosity images for eight phases (0°- 360°) covering each period. A comparison between the steady and pulsed flames and the effect of the pulsation frequency on soot volume fraction in the flame region and the post flame region are presented. The most significant effect of pulsing frequency was observed at 10 Hz. At this frequency, the flame with the lowest mean flow rate had 1.77 times enhancement in peak soot volume fraction and 1.2 times enhancement in total soot volume fraction; whereas the flame with the highest mean flow rate had no significant change in the peak soot volume fraction and 1.4 times reduction in the total soot volume fraction. A correlation (ƒv Reˉ1 = a+b· Str) for the total soot volume fraction in the flame region for the unsteady laminar ethylene flames was obtained for the pulsation frequency between 10 Hz and 200 Hz, and the Reynolds number between 37 and 55. The soot primary particle size in steady and unsteady flames was measured using the Time-Resolved Laser-Induced Incandescence (TIRE-LII) and the double-exponential fit method. At maximum frequency (200 Hz), the soot particles were smaller in size by 15% compared to the steady case in the flame with the highest mean flow rate.