Managing financial risk in Chinese stock markets: Option pricing and modeling under a multivariate threshold autoregression

The Shanghai Stock Exchange and the Shenzhen Stock Exchange have grown remarkably since their inception 20years ago. Many of the investors in these two markets are asset management firms or pension funds, some of which may offer guaranteed returns to their clients. To these investors, modeling and m...

Full description

Saved in:
Bibliographic Details
Published in:International review of economics & finance 2015-11, Vol.40, p.217-230
Main Authors: Li, Johnny Siu-Hang, Ng, Andrew C.Y., Chan, Wai-Sum
Format: Article
Language:English
Subjects:
Indexes
Investment advisors
Multivariate time-series
Rates of return
Regression analysis
Risk management
Risk-neutral valuation
Securities markets
Securities prices
Stock exchanges
Studies
Threshold autoregression
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:The Shanghai Stock Exchange and the Shenzhen Stock Exchange have grown remarkably since their inception 20years ago. Many of the investors in these two markets are asset management firms or pension funds, some of which may offer guaranteed returns to their clients. To these investors, modeling and managing the risk associated with their equity investments are highly important. In this paper, we use a multivariate threshold autoregressive (TAR) process to model the non-linear relationship between the two markets. This model may help fund managers better plan or execute their risk management decisions, as it captures the difference in investment return behavior when one market significantly out- or under-performs the other. We also contribute a risk-neutral version of the multivariate TAR model to the literature. This contribution permits one to price exotic options written on multiple stock indexes, and consequently helps fund managers calculate the cost of an option-based risk management strategy for funds involving the two Chinese markets.
ISSN:1059-0560
1873-8036
DOI:10.1016/j.iref.2015.02.022