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| Type | Master's Thesis |
| Scope | Discipline-based scholarship |
| Title | Options and Bubbles: An analysis of market cycles and bubble indictors with application to an options strategy |
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| Institution | University of Zurich |
| Faculty | Faculty of Business, Economics and Informatics |
| Number of Pages | 110 |
| Date | 2022 |
| Zusammenfassung | In this thesis, a bull call strategy is developed that exploits the positive long-term drift in the stock market and the divergence between option-implied and actual risk-neutral probability density functions. This strategy is tested for the S&P 500, NASDAQ-100, Russell 2000 and Dow Jones and complemented by two sub-strategies that invest excess liquidity in either a risk-free asset or the benchmark. Backtesting between 1996 and 2021 shows that the strategy can generate returns, especially for the S&P 500 and the NASDAQ-100, and the strategy combined with the benchmark yields over 20% per year in both cases. The strategy could only fail to convince with the Russell 2000. In addition, a regression is carried out on potential risk and return factors. For this, an expectation error factor is defined, which measures the deviation between the option price implied expected price of the underlying at maturity and the realised price of the underlying on that date. The strong performance of the S&P 500 can then be explained by the significantly lower costs of the strategy and that of the NASDAQ- 100 by the best expectation error. Subsequently, the development of the strategy in different market phases is analysed. It emerges that the strategy mainly performs well in a positive environment, while market crashes and longer sideways phases can lead to significant losses. To avoid these, two bubble indicators are introduced and tested with the strategy. Although the excess return momentum indicator is convincing for the underlyings, it does not improve the strategy. The use of the log-periodic powerlaw indicator mirrors the result. It performs worse with the indices than the first indicator, but can slightly improve the strategies in all cases. |
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