Essays On Information And Derivative Markets

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Doctor of Philosophy (PhD)
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Derivative pricing
Information asymmetry
Option pricing
Variance risk
Finance and Financial Management
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In the first chapter ("Option Prices and Disclosure: Theory and Measurement"), I develop an option-pricing model that formally incorporates a disclosure event. The model suggests that an understanding of a firm's disclosure policies can aid in efficiently pricing its options. Specifically, I find that 1) more informative disclosures lead to greater volatility in the firm's equity price upon their release, raising pre-disclosure option prices and 2) disclosures that are more informative for good-versus-bad news lead to skewness in the firm's equity price upon their release, adjusting the relative pre-disclosure prices of out-of-the-money and in-the-money options. Using these results, I develop measures of a disclosure's properties based on option prices that may be calculated on an event-specific basis. In the second chapter ("Additional Analyses of Option Prices and Disclosure"), I conduct further studies of the relationship between disclosure and option prices. First, I study the relationship between option prices and disclosure in static and dynamic models of voluntary disclosure. Second, I extend the measures developed in the first chapter to the case in which a firm's fundamentals are asymmetric. Third, I show that option-based measures of volatility and skewness developed in prior literature are not able to function as measures of a disclosure's properties. Finally, I show that the results in the first chapter apply for a multitude of disclosure properties found throughout the literature. In the third chapter ("Financial Markets with Trade on Risk and Return"), I develop a model in which risk-averse investors trade on private information regarding both a stock's expected payoff and risk. These investors may trade in the stock and a derivative whose payoff is a function of the stock's risk. I study the role played by the derivative, finding that it is used to speculate on future risk and to hedge risk uncertainty. Unlike prior rational expectation models with derivatives, its price serves a valuable informational role, communicating investors' risk information. Finally, I find that the equity risk premium is directly tied to the derivative price.

Robert E. Verrecchia
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