# Finance Discipline Group, UTS Business School, University of Technology, Sydney

# PhD Thesis

Postal: PO Box 123, Broadway, NSW 2007, Australia

Phone: +61 2 9514 7777

Fax: +61 2 9514 7711

Web page: http://www.uts.edu.au/about/uts-business-school/finance

More information through EDIRC

Phone: +61 2 9514 7777

Fax: +61 2 9514 7711

Web page: http://www.uts.edu.au/about/uts-business-school/finance

More information through EDIRC

**For corrections or technical questions regarding this series, please contact (Duncan Ford)**

**Series handle:**repec:uts:finphd

**Citations RSS feed:**at CitEc

### Impact factors

- Simple (last 10 years)
- Recursive (10)
- Discounted (10)
- Recursive discounted (10)
- H-Index (10)
- Aggregate (10)

**Access and download statistics**

**Top item:**

- By citations
- By downloads (last 12 months)

### 2017

### 2016

**35 Corporate Behaviour and Market Integration: Evidence from the Asia-Pacific Real Estate Market***by*Guojie Ma**32 The Impact of Mandatory Savings on Life Cycle Consumption and Portfolio Choice***by*Wei-Ting Pan**28 Animal Spirits and Financial Instability - A Disequilibrium Macroeconomic Perspective***by*Tianhao Zhi

### 2015

**27 Price Discovery in US and Australian Stock and Options Markets***by*Vinay Patel**26 Regression and Convex Switching System Methods for Stochastic Control Problems with Applications to Multiple-Exercise Options***by*Nicholas Andrew Yap Swee Guan**22 Essays in Market Microstructure and Investor Trading***by*Danny Lo**21 RAROC-Based Contingent Claim ValuationAbstract: The present dissertation investigates the valuation of a contingent claim based on the criterion RAROC, an abbreviation of Risk-Adjusted Return on Capital. RAROC is defined as the ratio of expected return to risk, and may therefore be regarded as a performance measure. RAROC-based pricing theory can indeed be considered as a subclass of the broader ‘good-deal’ pricing theory, developed by Bernardo and Ledoit (2000) and Cochrane and Sa´a-Requejo (2000). By fixing some specific target value of RAROC, a RAROC-based good-deal price for a contingent claim is determined as follows: upon charging the counterparty with this price and using available funds, we are able to construct a hedging portfolio such that the maximum achievable RAROC of our hedged position meets the target RAROC. As a first step, we consider the standard Black-Scholes model, but allow only static hedging strategies. Assuming that the contingent claim in question is a call option, we examine the behavior of maximum value of RAROC as a function of initial call price, as well as the corresponding optimal static hedging strategy. In this analysis we consider two specifications for the risk component of RAROC, namely Value-at-Risk and Expected Shortfall. Subsequently, we allow continuous-time trading strategies, while remaining in the Black-Scholes framework. In this case we suppose that the initial price of the call option is limited to be below the Black-Scholes price. Perfect hedging is thus impossible, and the position must contain some residual risk. For ease of analysis, we restrict our attention to a specific class of hedging strategies and examine the maximum RAROC for each strategy in this class. In the interest of tractability, the version of RAROC adopted risk is measured simply as expected loss. While the previous approach only permits us to examine the constrained maximum RAROC over a specific class of hedging strategies, we would like to employ a more general method in order to study the global maximum RAROC over all hedging strategies. To do so, we introduce the notion of dynamic RAROC-based good-deal prices. In particular, with reference to the dynamic good-deal pricing theory of Becherer (2009), such prices are required to satisfy certain dynamic conditions, so that inconsistent decision-making between different times can be avoided. This task is accomplished by constructing prices that behave like time-consistent dynamic coherent risk measures. As soon as the construction process is finished, we set up a discrete time incomplete market, and demonstrate how to determine the dynamic RAROC-based good-deal price for a call option. Furthermore, by following Becherer (2009), we derive the dynamics of RAROC-based good-deal prices as solutions for discrete-time backward stochastic difference equations. Finally, we introduce RAROC-based good-deal hedging strategies, and examine their representation in terms of discrete-time backward stochastic difference equations***by*Wayne King Ming Chan**17 Repeated Dividend Increases: A Collection of Four Essays***by*Scott Walker**16 Asset Pricing Under Ambiguity and Heterogeneity***by*Qi Nan Zhai

### 2014

**30 The Effects of Contagion During the Global Financial Crisis in Government-Regulated and Sponsored Assets in Emerging Markets***by*Edgardo Cayón**18 A Consistent Approach to Modelling the Interest Rate Market Anomalies Post the Global Financial Crisis***by*Yang Chang**13 Asset Price Dynamics with Heterogeneous Beliefs and Time Delays***by*Kai Li

### 2013

**23 Modeling Diversified Equity Indices***by*Renata Rendek**10 Stock Message Board Recommendations and Share Trading Activity***by*Kiran Thapa**4 The Microstructure of Trading Processes on the Singapore Exchange***by*Murphy Jun Jie Lee**2 Commodity Derivative Pricing Under the Benchmark Approach**

### 2012

**33 Financial Exclusion and Australian Domestic General Insurance: The Impact of Financial Services Reforms***by*Hugh Morris**11 The Impact of Institutional Ownership: A Study of the Australian Equity Market***by*Danny Yeung**3 Price Discovery, Investor Distraction and Analyst Recommendations Under Continuous Disclosure Requirements in Australia***by*Leonardo Fernandez

### 2011

**12 The Evaluation of Early Exercise Exotic Options***by*Jonathan Ziveyi**5 Credit Risk Modelling in Markovian HJM Term Structure Class of Models with Stochastic Volatility***by*Samuel Chege Maina

### 2010

**15 Modelling Default Correlations in a Two-Firm Model with Dynamic Leverage Ratios***by*Ming Xi Huang**14 Liquidity and Efficiency During Unusual Market Conditions: An Analysis of Short Selling Restrictions and Expiration-Day Procedures on the London Stock Exchange***by*Matthew Clifton**9 Portfolio Analysis and Equilibrium Asset Pricing with Heterogeneous Beliefs***by*Lei Shi**8 Portfolio Credit Risk Modelling and CDO Pricing - Analytics and Implied Trees from CDO Tranches***by*Tao Peng

### 2009

**19 Strict Local Martingales in Continuous Financial Market ModelsAbstract: It is becoming increasingly clear that strict local martingales play a distinctive and important role in stochastic finance. This thesis presents a detailed study of the effects of strict local martingales on financial modelling and contingent claim valuation, with the explicit aim of demonstrating that some of the apparently strange features associated with these processes are in fact quite intuitive, if they are given proper consideration. The original contributions of the thesis may be divided into two parts, the first of which is concerned with the classical probability-theoretic problem of deciding whether a given local martingale is a uniformly integrable martingale, a martingale, or a strict local martingale. With respect to this problem, we obtain interesting results for general local martingales and for local martingales that take the form of time-homogeneous diffusions in natural scale. The second area of contribution of the thesis is concerned with the impact of strict local martingales on stochastic finance. We identify two ways in which strict local martingales may appear in asset price models: Firstly, the density process for a putative equivalent risk-neutral probability measure may be a strict local martingale. Secondly, even if the density process is a martingale, the discounted price of some risky asset may be a strict local martingale under the resulting equivalent risk-neutral probability measure. The minimal market model is studied as an example of the first situation, while the constant elasticity of variance model gives rise to the second situation (for a particular choice of parameter values)***by*Hardy Hulley**7 Exchange Rate Forecasts and Stochastic Trend Breaks***by*David O'Toole

### 2007

**31 Pricing Swaptions and Credit Default Swaptions in the Quadratic Gaussian Factor Model***by*Samson Assefa**25 Pricing of Contingent Claims Under the Real-World Measure***by*Shane Miller**1 Numerical Solution of Stochastic Differential Equations with Jumps in Finance***by*Nicola Bruti-Liberati

### 2005

**29 Pricing American Options Using Fourier Analysis***by*Andrew Ziogas**6 A Class of Markovian Models for the Term Structure of Interest Rates Under Jump-Diffusions***by*Christina Nikitopoulos-Sklibosios