Chayawat Ornthanalai

Particle momentum effects from the detonation of heterogeneous explosives

Detonation of a spherical high explosive charge containing solid particles generates a high-speed two-phase flow comprised of a decaying spherical air blast wave together with a rapidly expanding cloud of particles. The particle momentum effects associated with this two-phase flow have been investigated experimentally and numerically for a heterogeneous explosive consisting of a packed bed of inert particles saturated with a liquid explosive. Experimentally, the dispersion of the particles was tracked using flash radiography and high-speed photography. A particle streak gauge was developed to measure the rate of arrival of the particles at various locations. Using a cantilever gauge and a free-piston impulse gauge, it was found that the particle momentum flux provided the primary contribution of the multiphase flow to the near-field impulse applied to a nearby small structure. The qualitative features of the interaction between a particle and the flow field are illustrated using simple models for the part...

Lévy Jump Risk: Evidence from Options and Returns

Using index options and returns from 1996 to 2009, I estimate discrete-time models where asset returns follow a Brownian increment and a Levy jump. Time variations in these models are generated with an affine GARCH, which facilitates the empirical implementation. I find that the risk premium implied by infinite-activity jumps contributes to more than half of the total equity premium and dominates that of the Brownian increments suggesting that it is more representative of the risks present in the economy. Overall, my findings suggest that infinite-activity jumps, instead of the Brownian increments, should be the default modeling choice in asset pricing models.

Accounting Information Releases and CDS Spreads

We show that accounting information releases generate large and immediate price impacts, i.e. jumps, in credit default swap (CDS) spreads. Our approach is multivariate, which allows for identification of information events under the presence of confounding news, such as credit events and other simultaneous news arrivals. The economic impact of accounting news releases is twice as large as the impact of credit-related news. Good and bad news impact jumps in CDS spreads asymmetrically, and unscheduled announcements are more likely to cause jumps than scheduled ones. The arrival of accounting information is quickly absorbed in CDS spreads, suggesting efficient price discovery in the CDS market.

Near‐Field Impulse Effects From Detonation of Heterogeneous Explosives

Particle momentum effects from the detonation of a spherical heterogeneous charge consisting of a packed bed of inert particles saturated with a liquid explosive have been investigated experimentally and numerically. When such a charge is detonated, an interesting feature of the subsequent flow field is the interplay between the decaying air blast wave and the rapidly expanding cloud of particles. Using a cantilever gauge, it is found that the particle momentum flux provides the primary contribution of the multiphase flow to the near‐field impulse applied to a nearby small structure. To determine the impulse from the particle momentum flux on the structure, a novel particle streak gauge was developed to measure the rate of particle impacts at various locations. The trends of the experimental results are reproduced using an Eulerian two‐fluid model for the gas‐particle flow and a finite‐element model for the structural response of the cantilever gauge.

Options Illiquidity: Determinants and Implications for Stock Returns

We study the determinants of individual options bid-ask spreads using proprietary intraday transactions data for the large cross-section of firms over an extended time period. We find that (i) hedging by options market makers plays the biggest role in determining spreads across all options categories, and rebalancing costs substantially dominate initial delta-hedge costs; (ii) options order imbalances associated with exogenous net demand shocks have independent impact on options bid-ask spreads which is comparable in economic magnitudes to delta-hedge costs; (iii) information asymmetry contributes to wider bid-ask spreads only for out-of-the money contracts, however, in economic magnitudes this effect is similar to net-demand shocks or delta-hedging costs. Overall, the results help understanding options market microstructure which differs substantially from the market of underlying equities.

Time-Varying Crash Risk: The Role of Stock Market Liquidity

We estimate a continuous-time model with dynamic crash probability using the S&P500 index options and high-frequency information. We find that market illiquidity is an important factor in explaining the time-varying stock market crash risk embedded in index options. While market illiquidity and return volatility play complementary roles in explaining the time-varying crash risk, the relative contribution of the volatility factor is weakened once we include market illiquidity as an economic variable. Examining the link between market illiquidity and option-implied crash risk, we find that the availability of arbitrage capital and adverse selection facing liquidity providers are economic driving forces.

Fluctuating Attention and Contagion: Theory and Evidence from the U.S. Equity Market

Contagion in financial markets occurs when return and volatility transmit between fundamentally unrelated sectors. We develop an equilibrium model showing that contagion arises because investors pay fluctuating attention to news. As a negative shock hits one sector, investors pay more attention to it. This raises the volatility of equilibrium discount rates resulting in simultaneous spikes in cross-sector correlations and volatilities. We test our theory in the U.S. equity market from 1980 to 2009. Using comprehensive customer-supplier relationships data to identify unrelated firms, we find evidence consistent with the models predictions.Abstract Financial contagion occurs when return and volatility transmit between fundamentally unrelated sectors. Our equilibrium model shows that contagion arises because investors pay fluctuating attention to news. As a negative shock hits one sector, investors pay more attention to it. This raises the volatility of equilibrium discount rates resulting in simultaneous spikes in cross-sector correlations and volatilities. We test the economic mechanism of the model on fundamentally unrelated U.S. industries, which are identified using their customer-supplier relationships. Consistent with the model’s predictions, empirical evidence shows that fluctuating attention generates return and volatility spillovers between fundamentally unrelated industries.

Options on Initial Public Offerings

We analyze the determinants and consequences of option listing on IPO firm stock. We find that options are listed earlier on venture-backed and lower-reputation underwriter IPOs. We find a significant decrease in stock returns immediately after option listing, persisting for a year. Analyzing the determinants of this equity underperformance, we find a permanent threefold increase in short-interest ratio and aggressive insider selling in IPO equity following option listing. Further, buying newly listed put options on IPO stock yields up to 6.3% monthly excess returns. Overall, we find that option listing relaxes short-sales constraints on IPO equity, thereby correcting short-run overvaluation.

Institutional Herding and Asset Price: The Role of Information

We study the price impact of daily institutional herding induced by information events. Using analyst recommendation changes as a proxy, we find that institutional herding on recommendation changes is short–lived. Daily institutional herding, on average, destabilizes price. However, herding accompanied by information arrival has the opposite effect. We find no evidence of price reversal when institutional investors herd in the direction of the recommendation change, but rather herding speeds up price adjustment. Consistent with informational herding models, we provide evidence that efficient price discovery and institutional herding are not mutually exclusive.We study daily institutional herding levels around the release of sell-side analyst recommendations. Such recommendations are forward-looking and indicate unambiguous direction of trades thus providing a good scenario to investigate informational herding behavior. We find that institutional herding on the recommendation release date is short-lived and specific to high turnover stocks suggesting that institutional investors herd during periods of significant disagreement. We do not find that institutional herding around recommendations destabilizes prices, but rather herding helps to speed up the information incorporated into stock prices. Consistent with investigative herding models, our results suggest that institutional investors herd upon the arrival of correlated information signals, and that such action improves market efficiency. This is in clear contrast with non-informational herding models, which are associated with subsequent return reversals.

Time-Varying Jump Intensities and Fat Tail Dynamics: Evidence from S&P500 Returns and Options

We present a new discrete-time GARCH jump framework that allows for rich dynamics in higher moments by combining heteroskedastic processes with fat-tailed innovations in returns and volatility. We provide a tractable risk neutralization framework allowing for option valuation with separate modeling of risk premia for the jump and normal innovations. Our models can be estimated with ease on returns using standard maximum likelihood techniques, and joint estimation on returns and a large sample of options is also feasible. We find very strong empirical support for time-varying jump intensities, when estimating on S&P500 returns and on returns and options jointly.