An behavior finance approach to asset price correlations and applications to financial engineering

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After the global financial crisis, a number of research papers on the U.S. stock market report a higher correlation among indusries. This phenomenon may not be explained through the conventional risk-return analysis. We apply a Markov switching model that contains both reversible and irreversible chains and find that the structural change of the market seemed to occur in 2003, well before the crisis.We also analyse bid-ask spreads, one of the liquidity measures, in the credit default swap (CDS) markets. These spreads are determined by the behaviors of the market participants. We successfully fit a self-exciting process combinded with time-changed Brownian motion. Moreover, we investigate the fund manager's optimal stopping problem where the fund is leveraged.