OPTION PRICING THEORY ASSIGNMENT 2003-2004
The requirements of this assignment included (a) the calculation of returns, (b) tests of the random walk hypothesis, (c) tests of serial correlation, (d) normality tests, (e) options pricing, and (f) volatilities calculation. Closing data for six UK equity stocks and the FT 100 Index provides the bases for the completion of the requirements.
Data were obtained covering the five-year inclusive period 7 December 1999 - 7 December 2004 for the equity stocks of six UK publicly traded companies included in the FT100 index, as well as the FT100 index itself. Closing index data reflecting total returns were collected on both daily and monthly bases.
Returns were calculated for each equity stock and the FT100 based on both the daily data and the monthly data. The returns were calculated as per cent gain or loss expressed as decimal fractions to the fourth decimal point. The method of calculating the returns was as follows:
Current Period Index Value - Prior Period Index Value
The results of the Step 1 calculations are summarized in Table 1 (which may be found on the following page). The data presented in the summary table are (a) mean returns (daily and monthly) and (b) standard deviations of daily returns and monthly returns. Complete sets of the calculated returns for all six equity stocks and the FT100 on both daily and monthly bases are contained in the attached Microsoft Excel workbook (Step 1 Calculations).
Table 1 - Step 1 Calculations of REturns
The random walk hypothesis refers to the process of determining whether or not a statistical pattern is present in a particular dynamic activity, or whether movements within the activity are random. The random walk concept, as it is used in common stock portfolio analysis and investment, refers to the application of the runs test to stock market prices and returns. Specifically, the runs test seeks to ascertain the presenc...