Quantitative Investment: Pricing Model And Investment Strategy Of Some Financial Derivatives

Quantitative investment is an investment which has become more and more important in Wall Street in recent decades, and gradually become the mainstream way of investment in Wall Street in recent years. With the development of China’s financial derivatives market, quantitative investment will gradually develop and grow in China. The theory about the investment and investment strategy will be the focus on future research. From a theoretical point of view, the most important issue in the study of quantitative investment theory is the pricing of financial products. From a practical point of view, investors are more concerned about investment strategy based on the theory which can get earnings in the market. Both pricing model and the invention of investment strategy have great value for both theoretical researchers and practitioners.This article consists of two major parts. One part is pricing of options and futures. The other part is investment strategies related to options trade, futures trade, and stock exchange. The research work includes some of the following aspects:(1). Based on the option pricing model of BS, this paper establishes the option arbitrage strategy which is in line with the market of our country. Classic option pricing model of Black and Scholes formula has given option price theo-ry, the option price P(T) can be expressed as a function of stock price S(T), expected stock return rate μ, fluctuations in the stock rate σ, risk-free rate of interest r, exercise price K, expire date of the option Υ, but this pricing model has obvious weakness. One of the most obvious shortcoming is:the assumption that stock volatility is constant in the model, which is unfit for the actual of the market. The model of Heston and AHBS, starting from different assumptions to solve the problem of BS model’s problem that the volatility a must be a constant. From the other point of view, this paper uses the Stoll’model which is about re-sults European call option pricing formula-PCP model, By consideration of the various costs such as impact cost TI, transaction costs TC, margin opportunity cost TB in the real transaction process in China’s option market, We have created a non risk arbitrage strategy which is suitable for China’s option market, which is a procedural trading strategy. This strategy can solve the problems in the actual transaction process.(2). By improving the model of Klemkosky and Lee, this paper establishes a model of stock index futures in China’s market. French and Cornell create model of stock index futures pricing-cost of carry, the model has some strict assumptions in the perfect market, the risk-free interest rate r is constant and so on. Futures price F(T) can be expressed as a function of stock price S(T) in this model, But the the assumption that risk-free interest rate r is constant which does not accord with the actual situation. Ramaswamy and Sundaresan extend the model and they create stochastic interest Rate Model, and they solve the problem that the risk-free interest rate r is constant. A large empirical studies showed there are large differences between calculating the futures price F(T) witch comes from the the two model and the real marcket price F(T)’. Under the CIR framework Hemler and Longstaff using theory of Merton’s functions, they get the general equilibrium pricing model, By the considering about factors such as interest rates and spot fluctuations, they obtain the equilibrium price price of stock index futures. By analyzing the transaction costs、impact costs、margin financing and other factors of Hushen 300 stock index futures, using the model of Klemkosky and Lee, we obtain a new pricing model which can be applied well in the stock index futures market of our country. Further, we use this model to do an empirical research. In this research, we compared the relationship between the real data which comes from some contracts of stock index futures and the other data which comes from the calculation of the model. These contracts include:IF1506、IF1507、IF1508、IF1509、IF1510 and each data(2014.10.20- 2015.10.16.) which comes from all of the contracts is minute closing price. The research shows that:many real data which comes from minute closing price stays outside of the model calculation interval and this kind of situation often happens, there are a lot of arbitrage opportunities.(3). Using the theory of incomplete principal component analysis, this paper constructs a suitable to China’s new stock model for the selection of stocks. To deal with the stock trading related to the quantitative strategy, the final two core issues have to be solved:the choice of which stocks and the choice of what time point trading stocks. In the choice of stock, effectiveness of the multi factor model has been proved by Riehard, Ross, Fama, French and others. This paper mainly analyses the advantages and disadvantages of the multi factor model which is widely used, then we create a new model to solve the disadvantages of old model, the new model uses the PCA analysis method, model construction with only a few factors. In this paper, the validity of the new model is verified by the real market data, and the empirical results show that the earning of the new model is far more than the earning of index on the same period.(4). By the improvement of the classic stock technology indicators for timing of choice, this paper established a quantitative timing model in line with China’s stock market. In the selection of the timing of the stock trading, Charles Dow put forward a model based on the use of technical indicators to analyze the timing of the sale. The theory of technical analysis is the development by Magee John, Edwards Robert, Murphy John, Appel Gerald, et al. The technical analysis theory has been widely used. Most commonly used technical indexes of the model include:average (MA) model, (MACD) model, stochastic (KDJ) model, boll indicators (boll) model. These models has been the recognition of a large number of investors. These models have played an important role in the choice of the timing of stock trading, but the shortcomings of these models are obvious:model prediction accuracy and parameter selection, but the choice of these parameters changes with the change of the market changes, Investors can not use a fixed set of parameters to solve the problem when they are buying some stocks; model frequently sends false trading signals of buying and selling signals caused by the transaction cost increasing and the earning will be loss; the signals of buying and selling are usually more lagged behind the real business opportunity. In this paper, we create a new quantitative model of market of our country, the model is the extension of the model (MA). The model can solve the ploblems of the traditional model. The empirical results show that new model for choosing stock buying opportunity has obvious effect.