PhD Oral Exam - Majid Maleki, Business Administration

When studying for a doctoral degree (PhD), candidates submit a thesis that provides a critical review of the current state of knowledge of the thesis subject as well as the student’s own contributions to the subject. The distinguishing criterion of doctoral graduate research is a significant and original contribution to knowledge.

Once accepted, the candidate presents the thesis orally. This oral exam is open to the public.

Abstract

This thesis consists of three essays on derivatives markets. The first essay develops a model-free method, the generalized rearrangement algorithm (GRA), to recover option-implied dependence across currencies. It combines marginal risk-neutral distributions recovered from foreign exchange options into a joint distribution subject to triangular no-arbitrage constraints. The resulting framework allows currency correlation risk premia to be studied directly from option-implied joint distributions. The empirical results show that these premia are strongly state-dependent. The average premium is positive in broad U.S. dollar depreciation states, when non-USD currencies tend to appreciate together, but negative in broad U.S. dollar appreciation states, when non-USD currencies tend to depreciate together and diversification benefits weaken.

The second essay examines retail trading in Nadex binary options on S&P 500 futures. It introduces an empirical method for inferring trade direction, classifying trades as retail buys or sells by comparing Nadex prices with benchmark binary values derived from liquid S&P 500 index options. The analysis shows that retail positions generate negative average returns even before exchange fees. These losses extend beyond low-cost, lottery-like contracts and are also evident among moderate- and high-cost binary options. Overall, the results indicate that retail traders systematically overpay for simple, short-maturity binary bets.

The third essay tests whether the open/close labels in the Cboe Open-Close Volume Summary are consistent with open-interest data from the Options Clearing Corporation (OCC). For S&P 500 index options, a substantial fraction of option-series-day observations cannot be reconciled with changes in open interest under any feasible allocation of market-maker buy and sell volume between opening and closing trades. Trade-level evidence from the Cboe Enhanced U.S. Options Trade-by-Trade dataset further shows that violation rates are higher when the reported market-maker open/close labels are used in the reconciliation. These findings have direct implications for empirical measures that distinguish between opening and closing option volume, including measures of option demand, position opening, and investor trading activity.