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This thesis studies a few different finance topics on the application and modelling of jump and stochastic volatility process. First, the thesis proposed a non-parametric method to estimate the impact of jump dependence, which is important for portfolio selection problem. Comparing with existing literature, the new approach requires much less restricted assumption on the jump process, and estimation results suggest that the economical significance of jumps is largely mis-estimated in portfolio optimization problem. Second, this thesis investigates the time varying variance risk premium, in a framework of stochastic volatility with stochastic jump intensity. The proposed model considers jump intensity as an extra factor which is driven by realized jumps, in addition to a stochastic volatility model. The results provide strong evidence of multiple factors in the market and show how they drive the variance risk premium. Thirdly, the thesis uses the proposed models to price options on equity and VIX consistently. Based on calibrated model parameters, the thesis shows how to calculate the unconditional correlation of VIX future between different maturities.

In this thesis, I examine why there are distortions in investor portfolio selection, and show the consequence of these distortions on firms' investment decisions. The thesis consists of three essays. In the first essay, I examine the economic consequences of the mandatory adoption of IFRS in EU countries by showing which types of economies have the largest reduction in investment-cash flow sensitivity post-IFRS. I also examine whether the reduction in investment-cash flow sensitivity depends on firm size as well as economy type. I find that the investment-cash flow sensitivity of insider economies is higher than that of outsider economies pre-IFRS and that IFRS reduces the investment-cash flow sensitivity of insider economies more than that of outsider economies. Also, I find that small firms in insider economies have the highest sensitivity of investment to lagged cash flow pre-IFRS, and that they are no longer sensitive to lagged cash flow post-IFRS. Overall, my results suggest that IFRS adoption might have improved the functioning of capital markets in relation to small firms in insider economies. In the second essay, I show that the level of conditional accounting conservatism of foreign markets significantly influences decisions to diversify portfolios internationally. This could be either because conditional conservatism per se is attractive to international investors, or because the unmodelled factors that attract foreign investors to a country also cause these countries to adopt conditionally conservative accounting practices. We also find that the positive association between investor diversification decision and conditional conservatism is sensitive to the level of conditional conservatism of investors' home markets. If conditional conservatism serves to alleviate foreign investors' concerns related to insiders have asymmetric access to information then one would expect the chosen mode of entry into a foreign market (as foreign portfolio or direct investor) to be sensitive to the level of conditional conservatism. I find evidence supportive of this expectation.In the third and final essay, I document pieces of evidence suggesting that the stock ownership of politicians is a mechanism to establish mutual relations with firms. There is a positive association between the ownership of politicians and the contribution they receive from firms during the elections. This association is a function of how valuable it is to establish a mutual relation between politicians and firms. Politicians invest more in firms that favor their party and less in firms that oppose their party. The strength of the ownership-based relation with contributing firms is positively associated with the amount as well as the number of government contracts awarded to firms. When politicians divest the stock, the established relation with contributing firms breaks down. Such break-down, however, only exist when there are no other mechanisms enforcing politician-firm relation.

This thesis is comprised of three separate empirical chapters on the closed-end fund industry. The first chapter examines the performance and trading volume of UK Venture Capital Trusts (VCTs) focusing on the expiry of the minimum holding period required for investors to gain income tax relief on VCT shares bought at flotation. The second explores the effect of repurchase transactions on the stock liquidity of UK closed-end funds. The third chapter investigates the relationship between pay-performance sensitivity (PPS) and fund risk of US closed-end funds. The first empirical chapter finds negative abnormal returns and permanent increases in trading volumes at and around the expiry of the required holding periods of VCTs. VCTs investing in companies listed on the Alternative Investment Market experience higher abnormal returns and lower abnormal trading volumes than VCTs investing in unquoted companies. VCTs with better asset performance during the required holding period have lower abnormal returns and higher abnormal trading volumes. Income tax relief becomes more generous (increases from 20 to 40 percent) and holding periods shorter (from five to three years) over the sample period. The more generous (to the investors) the income tax relief, the higher the abnormal returns and the lower the abnormal trading volumes. The second empirical chapter reports that repurchase transactions improve the stock liquidity of closed-end funds suggesting that funds act as “competing market makers”. However, the positive liquidity effect of repurchase transactions is short-lived and positively affected by the frequency of repurchase transactions. The positive effect seems to have been increased by the change in repurchase regulations on 1st December 2003 that allowed funds to re-issue repurchased shares and appears to have increased the ability of funds to manage their stock liquidity.The third empirical chapter finds that fund risk has a positive impact on fund PPS, suggesting that shareholders need to provide greater compensation incentives to managers of riskier firms to reduce the adverse selection problem. PPS has a positive effect on fund risk, which suggests that, in the closed-end fund industry, the increase in the value of the fund manager’s wealth due to a higher PPS outweighs the negative effect of increased pay volatility on the manager’s expected utility.

This thesis examines various aspects of risk for UK investment trusts from the shareholders' viewpoint. For conventional trusts, a model is developed which splits the variance of returns to shareholders into three components - variance of net asset value (NAV) returns, variance of discount returns and twice the covariance between NAV returns and discount returns. Using historical data, the relative importance of each of these components is estimated for different return intervals and for different periods of observation. There is clear evidence of excess volatility of trust share returns compared with NAV returns. Since Big Bang in 1986, there has been a significant 'double whammy' effect, meaning that discounts tend to widen when NAVs fall and narrow when NAVs rise. Overall, the results contradict the efficient market model but are consistent with the noise trader model. Discount volatility is generally an important component of total risk for conventional trusts using monthly returns but there is considerable cross-sectional variation in the magnitude of this discount volatility. These are interesting aspects of the closed-end fund discount puzzle which have received little attention in the literature, and a cross-sectional analysis is carried out to explain the variation in discount volatility across the sector. The results suggest that the main drivers of discount volatility are new information hitting the market for trust shares and volatility of NAV returns. Discount arbitrage traders try to take advantage of discount anomalies but their activities are restricted, particularly for less marketable trusts. There is no evidence that either individual investor sentiment or UK specific sentiment has any impact on discount volatility. Statistical measures of risk based on historical data are useful tools for conventional trust securities but are of limited use for split capital trust securities. Analysts are often more concerned with the sensitivity of these securities to changes in the underlying fundamental variables and an alternative approach to the risk assessment of split capital trusts is proposed.

In today's world of volatile currencies and increasing levels of cross-border trade, few companies, if any, are unaffected by movements in foreign exchange rates. This thesis investigates the impact of currency fluctuations on UK non-financial companies. In particular it focuses on their economic exposure, or the impact of unexpected changes in foreign exchange rats on the future cash flows of the firm. The empirical research presented in this thesis is based on two postal surveys that were distributed to the finance directors of listed UK non-financial companies (in 1996 and 1997) and also interviews conducted with some of the survey respondents. The aim of the research is to discover the direction, magnitude, and causes of the economic exposure faced by UK firms. This thesis takes as its primary focus the investigation of the indirect, or competitive determinants of economic exposure, in addition to the direct exposures arising from the volume of a company's cross-border trade. The study also reports on the extent to which the sample companies are able to make adjustments to their operating policies such as production location, input sourcing and pricing in order to reduce the sensitivity of their cash flows to foreign exchange rate movements. The principal conclusion of this thesis is that the cash flows of UK companies are less sensitive to changes in foreign exchange rates than the economic exposure theory would suggest. There are two explanations for this finding. The first is that many companies have achieved a natural hedge from currency fluctuations by purchasing a high proportion of their inputs in the foreign currencies they receive for their export sales. A second explanation is that some of the surveyed finance directors may not be aware of the full impact of foreign exchange rates on the competitive position of their companies. The survey evidence also suggests that the direct sources of economic exposure such as the extent to which a company sells in foreign markets are more significant than the indirect sources such as the geographical location of a company's competitors.

After the demise of the feudal taxation system of the Malay Sultanate, the system of indirect and direct taxation introduced by the British colonial government was the most important aspect of the fiscal policies of the Malayan government. Though Malaysia progressed in its modernisation programmes, the model of the tax system still maintains its British origin. The development of the taxation system, secular and religious, in British Malaya and independent Malaysia is the subject of this study which explores its development and impact on fiscal policies and the Majlis Ugama for the period 1900-1957. Chapter one provides an introduction dealing with the legal basis of Islamic taxation, its assessment and collection which provides the basis for an understanding of the development of religious taxes discussed in Chapters four and five Chapter two is divided into three parts. Chapter two Part I explores the Structure of the Revenue System of the Malay Sultanate and its demise as a result of the imposition of the Colonial Residential System. Chapter 2 Part II explores the Advent of British Administration in the Malay Peninsula and Singapore. Chapter 2 Part III explores the development of an indirect taxation system based on British precedents for the period 1900-1957. Chapter three explores the development of taxation on income for the period 1900-1957. The rationale for the latter point is that Malaysia received her independence on 31<SUP>st</SUP> August 1957, which in effect saw a gradual transfer of administrative power from colonial to native administrators but still under supervision Post-1957 saw the secular taxation system reaching its fully developed stage in which almost all instruments of taxation known to the colonial tax administrators enforced in the British Colonies and Protectorates had been introduced in British Malaya. Chapter four explores the development of the several Majlis Agama Islam Negeri (State Councils of Islamic Religion), which governed religious administration, with emphasis on zakat administration under the auspices of the British Colonial Residential System.

This thesis takes as its subject the market for Initial Public Offerings (IPOs) of equity securities in the United Kingdom. The principal aim of the study is to try to find an explanation for why investments in IPOs in the UK provide an average excess return to investors. Once levels of excess returns have been identified this study seeks to offer 'stabilisation' as intuitively appealing, theoretically sound and practically evidenced explanation of excess returns in the UK IPO market. This thesis then goes on to look at the UK IPO market in more detail, paying particular attention to the roles played by sponsoring agents involved in the IPO process and what impact they have, if any on differential levels of excess returns between IPOs. The economic efficiency of the IPO market is also addressed at this point. The final piece of research in this thesis examines the subject of management buyout flotations. The aim here is to provide evidence to support the claim forwarded that management buyout flotations produce superior performance to the universe of IPOs as a whole. The data set used for this thesis is made up all flotations undertaken in the United Kingdom in the period from 1989 to 1995.

This thesis focuses on variance risk and correlation risk in the equity market, and consists of three essays. The first essay demonstrates that the variance risk, mea- sured as the difference between the realized return variance and its risk-neutral expectation, is an important determinant of the cross-sectional variation of hedge fund returns. Empirical evidence shows that funds with significantly higher loadings on variance risk outperform lower-loading funds on average. However, they incur severe losses during market downturns. Failure to account for variance risk results in overestimation of funds' absolute returns and underestimation of risk. The results provide important implications for hedge fund risk management and performance evaluations. The second essay examines the empirical properties of a widely-used correlation risk proxy, namely the dispersion trade between the index and individual stock options. I find that discrete hedging errors in such trading strategy can result in incorrect inferences on the magnitude of correlation risk premium and render the proxy unreliable as a measure of pure exposure to correlation risk. I implement a dynamic hedging scheme for the dispersion trade, which significantly improves the estimation accuracy of correlation risk and enhances the risk-return profile of the trading strategy. Finally, the third essay aims to forecast the average pair-wise correlations between stocks in the market portfolio. I investigate a comprehensive list of forecasting models and find that past average correlation and the option-implied correlation provide superior out-of-sample forecasting performance compared to other predictors. I provide empirical evidence showing that the forecasts of average correlation can improve the optimal portfolio choices and substantially enhance the performance of active correlation trading strategies.

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