This thesis explores a number of aspects of time series modelling of exchange rate volatility. After having reviewed the main modelling approaches used in the existing literature, the first key chapter investigates the best models for forecasting the volatility of daily exchange rate returns for a number of countries, including new results for a selection of developing countries. The superior performance of the FIGARCH model, noted in the recent literature, is confirmed in the case of industrialised countries, but the MARCH model results in substantial gains in insample estimation and out-of-sample forecasting performance when dealing with developing countries. The next essay investigates exchange rate volatility co-movements and spillovers before and after the launch of the Euro. This study has the advantage of a longer sample period than the most comparable papers. Key results are that the dominance of the Deutschemark in volatility transmission was succeeded by the dominance of the Euro following its launch, in that both exert unidirectional and persistent spillovers on the sterling, the Swiss franc and the Japanese yen. Further, there is evidence of greater stability in financial markets after the launch of the Euro in that conditional variances, covariances and correlations in exchange rate returns declined significantly. Finally the thesis turns to assessing the impact of official central bank interventions (CB1s) on exchange rate returns, their volatility and bilateral correlations. By exploiting the recent publication of intervention data by the Bank of England, this study is able to investigate interventions by a total number of four central banks, while the previous studies have been limited to three (the Federal Reserve, Bundesbank and Bank of Japan). The results of the existing literature are reappraised and refined. In particular, unilateral CBI is found to be more successful than coordinated CBI. The likely implications of these findings are then discussed.

No two crises are identical. As we learn from them, they evolve and change. This thesis is an attempt to understand some of their features. We discuss the abandonment of a peg (Chapter 2), full disruption of payments (Chapter 3) and illiquidity in one-sided markets (Chapter 4). Chapter 2 investigates the consequences of introducing uncertainty about the willingness of a central bank to defend the peg in an economy in which a government runs a persistent deficit. We analyze how not knowing when other arbitrageurs intend to attack a currency affects investors' decision to attack. Specifically, we show how the lack of common knowledge induces arbitrageurs to delay their attack on the currency, which in turn leads to a discrete devaluation of the exchange rate as it is generally observed during currency crises. In Chapter 3 we examine how financial integration of payment systems creates a feedback channel which might threaten the stability of financial markets. In payment systems, banks rely heavily on incoming transfers to finance outgoing payments requiring a high degree of coordination and synchronization. We study the response of the payment system to disruptions in payments and to changes in the precautionary demand for liquid balances targeted by the different institutions in a payment system. This work aims to shed light on the recent events in credit markets. The analysis of liquidity in one-sided markets is the focus of Chapter 4. When a market is in distress, liquidity typically vanishes playing a key role in the build-up of one-sided markets. We present an alternative view of market liquidity which results from a tradeoff between market externalities and a congestion effect. When congestion is the dominating effect, as during fire sales, diminishing market frictions can deteriorate liquidity and reduce welfare. Our results provide a rationale for circuit breakers.

This thesis is a collection of four essays dealing with issues on the verge of macroeconomics and finance. The first two chapters are joint with Bianca De Paoli. In the first one, we try to analyze factors causing risk premia to vary over time. The second one is an attempt to understand how these factors - manifesting themselves through swings in the desire to save for precautionary reasons - affect monetary policy. We show analytically that in endowment economies, procyclical recession expectations can 'outweigh' countercyclical changes in 'risk-aversion' - generating counterfactual risk-premium behavior. However, allowing shocks or habits to be sufficiently persistent, or explicitly accounting for the impact of habits on consumption, suffices to generate countercyclical recession risks and risk premia. We also show that taking note of precautionary saving motives justifies an accommodative policy bias in the face of persistent, adverse disturbances. Equally, policy should be more restrictive - i.e. 'lean against the wind' - following positive shocks. Both of these essays rely on approximate solutions to a simple, external habit model. In the third chapter, I derive closed form formulae for the model's solution. I then use these formulae to estimate the model and analyze its ability to jointly fit consumption growth and asset price data. I find no specification capable of simultaneously matching these data and argue that 'exotic' shock distributions are an unlikely panacea. In general, however, closed form formulae for asset prices cannot be derived analytically and need to be approximated. The final chapter proposes a method of doing exactly that. In contrast to several alternative approaches, the approximating function is not restricted to be a polynomial in state variables. This flexibility and efficient use of nested solutions can allow 'low-order' formulae to exceed the accuracy of higher-order perturbation approximations.

This dissertation studies the effect of the changes in corporate dividend policy on the predictability of stock returns. The first two chapters re-visit the question of what drives stock returns after controlling for these market-wide changes in the cross-sectional profile of dividend paying firms, and the third chapter studies the nature of these changes across different industry groups, stock market indexes, size and age. There have been several significant changes in the nature of corporate payout policy of US firms over the last several decades. We focus our work on the effect of two of these changes, using the present value model, into the question of what drives stock returns-cash flows or discount rate news. Chapter 1 studies the effect of the large decrease in the proportion of dividend paying firms in changes in expected cash flows and/or discount rates by focusing on portfolios of dividend paying firms rather than aggregate portfolios of all listed firms. Our results, from Chapter 1, imply that the relatively importance of cash flows and discount rate news is intimately related to the cross-sectional variation in the patterns of dividend payers in the stock market and provide an intuitive explanation for the contradictory results documented in the existing literature. Chapter 2 builds on Chapter 1 and tries to reconcile and explain why results using the return and the book-to-market decomposition differ for the post-WW II period. It also provides with an alternate explanation different from dividend smoothing for the apparent absence of dividend growth predictability in post-WW II U.S. data. We find that predictive regressions based on the return on equity decomposition are sensitive to the way in which firm-level data is aggregated. Specifically we find that when firm-level data is weighted by value both decomposition methods -the Campbell-Shiller and the Voulteenaho return decompositions provide strong support for cash flow news as a driver of stock returns in post-WW II data. We also find that, in post-WW II data, the existence of cash flow news is driven by the fact that the biggest firms by market capitalization are not always those that generate the biggest earnings or pay the largest dollar dividends. In Chapter 3, the final part of this work, we investigate the anatomy of corporate payouts. Specifically, we use firm-level data to understand which firms drive the changing patterns of payouts over time and in the cross-section. Our work extends the current literature by studying firms payouts based on industry sectors, firm age and other attributes. Our main finding is that we find support for our conjecture - in Chapter 2, that the biggest firms by market capitalization are not always those that generate the biggest earnings or pay the largest dollar dividends.

Only recently, in 2003, did the Saudi Arabian legislator issue a capital market law and create a regulator vested with its enforcement. This recently-created regulator, the Capital Market Authority (“CMA”), is still in the process of building the regulatory framework governing capital markets. Some regulatory instruments were actually issued as recently as December 2012 and other instruments are still under preparation. This thesis provides an overview of the legal framework governing Saudi Arabian capital markets and evaluates its adequacy in the organization of capital market transactions and the protection of market participants. This thesis delivers a number of proposals for legal and institutional reforms. For instance, this thesis recommends that a greater role be given to international non-governmental Islamic organizations for the formulation and attempted harmonization of Sharia standards applicable to capital market transactions. This thesis contends that the CMA should interact more closely with the regulated sector and allow greater transparency regarding the rationale and process of development of legal rules. This thesis also contends that the CMA should cooperate more closely with other regulators on the national and international planes, so to control systemic risks more effectively and achieve greater market efficiency. In order to minimize systemic risks, this thesis suggests the diversification of sectors listed on the stock exchange. Finally, this thesis describes the regulatory framework as a possibly effective socio-economic policy tool, which can be utilized in parallel, along other available policy tools. This thesis contends that the CMA should play a larger role in the pursuit of Saudi Arabia's socio economic priorities and should prioritize securities offers and investments with greater anticipated socio-economic yields.

This thesis consists of three distinct essays on finance, market structure and performance. Paying particular attention to the degree of industry competition, the first essay investigates the relationship between capital structure and firm performance using panel data consisting of 257 South African firms over the period 1998 to 2009. The essay applies a novel measure of competition, the Boone indicator, to the leverage-performance relationship. The results suggest that financial leverage has a positive and significant effect on firm performance. It is also found that product market competition enhances the performance effect of leverage. The results are robust to alternative measures of competition and leverage. The second essay examines the extent of banking competition in African subregional markets. A dynamic version of the Panzar-Rosse model is adopted beside the static model to assess the overall extent of banking competition in each subregional banking market over the period 2002 to 2009. Consistent with other emerging economies, the results suggest that African banks generally demonstrate monopolistic competitive behaviour. Although the evidence suggests that the static Panzar-Rosse H-statistic is downward biased compared to the dynamic version, the competitive nature identified remains robust to alternative estimators. Paying particular attention to the degree of banking market concentration in developing countries, the third essay examines the effect of credit information sharing on bank lending. Using bank-level data from African countries over the period 2004 to 2009 and a dynamic two-step system generalised method of moments (GMM) estimation, it is found that credit information sharing increases bank lending. The degree of banking market concentration moderates the effect of credit information sharing on bank lending. The results are robust to controlling for possible interactions between credit information sharing and governance.

The Judge-Advisor System (JAS) highlights the importance of advice within the decision making process. Past JAS literature has focused on ways in which to improve advice utilisation and clients’ decision outputs. The aim of this thesis was to focus on an under researched area within the JAS literature: the advice giver. It predominantly aimed to explore three main input areas in relation to what makes a good advice giver: characteristics of the advice giver, the quality of advice, and how the advice is given. It began by identifying individuals’ implicit understanding of what characteristics are important for a good advisor. A three-factor framework was developed, which relates to advisors’ affect, behaviour, and cognition. Further, it explored whether two external motivators (the type of advisors’ financial incentive and competition between advisors) impacted advice quality (the accuracy of recommendations, amount of advice provided, and amount of information acquired) and how the advice is given (how confident the advisor appeared to their client). The type of advisors’ financial incentive impacted advisors’ input within an estimation task, but was not consistent within a choice task. Competition alone was found to have no impact on the advisors’ input. When competition and the advisors’ incentive (financial or quality) were explored together, competition, not the advisors’ incentive, impacted advice quality. A combination of both competition and a financial incentive was found to increase advisors’ public confidence. Finally, as advice-giving is an interactive process, the impact on the client was also explored. Clients’ ratings of their advisors’ trustworthiness were found to predict advice utilisation which increased clients’ decision accuracy but did not predict clients’ decision confidence. The thesis has begun to explore optimal characteristics of good advice givers and how external factors influence advisors’ inputs. Implications of the findings are discussed.

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This thesis comprises three essays in international finance, with a focus on the foreign exchange (FX) market. The first chapter examines the pricing ability of the short- and long-run components of global FX volatility in the cross-section of carry trade returns. I find a negative and statistically significant factor risk price for the long-run component. Low interest rate currencies covary positively with innovations in the long-run component of volatility, while currencies with high interest rates covary negatively. Interestingly, I do not find significant evidence in favor of the short-run volatility component being a cross-sectional priced risk factor. I also show empirically that the long-run component is the dominant part of global FX volatility and is dynamically related to US-specific macroeconomic fundamentals such as industrial production and money balances. The second chapter investigates the time-series predictability of bilateral exchange rates from unconditional and conditional linear factor models using dollar, carry, and global FX volatility risk factors. I find evidence that all versions of the models largely fail to outperform the random walk with drift benchmark in out-of-sample forecasting of monthly exchange rate returns for individual currencies. This holds for currencies sorted into portfolios conditional on forward discounts. I also show that information embedded in dollar, carry, and global FX volatility risk factors do not generate systematic economic value to investors. In fact, linear factor models with currency-based risk factors do not outperform the random walk with drift benchmark in out-of-sample economic value analysis.

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