Extending Tree Structure and Its Application in Contingent Claims’ Pricing and Empirical Phenomena Analyses

• Main Authors: Liu, Liang-Chih, 劉亮志
• Other Authors: Dai, Tian-Shyr
• Format: Others
• Language: en_US
• Published: 2016
• Online Access: http://ndltd.ncl.edu.tw/handle/34d54d

博士 === 國立交通大學 === 財務金融研究所 === 104 === This study contains two applications on contingent claims’ valuation using the tree method. The first application is the evaluation of the variable annuity products associated with a guaranteed minimum withdral benefit (GMWB) and a guaranteed lifelong withdrawal benefit (GLWB). Specifically, a novel three-dimensional tree is established to capture how different policy provisions affect the evaluation of GMWB/GLWBs as investment, interest rate and mortality risks are considered simultaneously. The second application is the evaluation of corporate securities based on the structural model of credit risk. Although many different aspects of debt structures such as bond covenants and repayment schedules are empirically found to significantly influence values of bonds and equity, many theoretical structural models still oversimplify debt structures and fail to capture phenomena found in financial markets. To overcome such shortcoming, a carefully designed structural models that faithfully models typical complex debt structures containing multiple bonds with various covenants For example, the ability for an issuing firm to meet an obligation is modeled to rely on its ability to meet previous repayments, and the default trigger is shaped according to the characteristics of its debt structure such as the amount and schedule of bond repayments. Thus our framework reliably provides theoretical insight and concrete quantitative measurements consistent with extant empirical research such as the impact of payment blockage covenants on newly-issued and other outstanding bonds. We also develop the forest, a novel quantitative method to handle contingent changes in the debt structure due to premature bond redemptions. A forest consists of several trees that capture different debt structures, for instance those before or after a bond redemption. This method can be used to investigate how the presence of wealth transfer among the remaining claim holders due to a bond redemption influences the firm’s call policy, or further reconcile conflicts among previous empirical studies on call delay phenomena.