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This thesis is an empirical study of the volatility and correlation in financial markets, and consists of two parts: The first part is on econometric modeling of the volatility and correlation (Chapter 1). The second part is on the pricing implication of the correlation and volatility as risk factors (Chapter 2 and 3). The thesis begins with proposing a regime-switching multivariate GARCH model of volatilities and correlation. We incorporate the Markov-switching mechanism into the Constant Conditional Correlation model (CCC). The proposed model allows us to capture the different dynamics in both the volatilities and correlations in different regimes. It is particularly useful in examining the contemporaneous relationship between the unobservable volatility and correlation processes. We apply our model to the stock market index paired with two bond market indexes. Then in the second chapter, we estimate the risk premium for the average correlation in the cross-section of the US stock market. The average correlation is the cross-sectional average of the correlations between each pair of stocks in the stock market. We find there is a negative and statistically significant risk premium for the average correlation controlling for other factors such as Fama-French's SMB and HML as well as the liquidity factor and momentum factor. The third chapter focuses on the risk-return relation using a set of variance-related risk measures. We combine two lines of literature both of which find significant forecasting power of some risk measures for stock market returns: variance risk premium literature and studies on average variance-correlation decomposition. We illustrate how these two approaches can be related to each other, and empirically evaluate the relative importance of two approaches.

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This thesis is divided into three chapters. Even though the three chapters have different aims, they all concerned with corporate finance. The first chapter concerns venture capital and chapters two and three deal with corporate governance. The first chapter deals with a special kind of security used in venture capital contracting -participating convertible preferred stock. Participating Convertible Preferred (PCP) stock is similar to convertible preferred stock but comes with participation rights. Participating rights allow the holder to participate in earnings along with common shareholders. PCPs play an important role in venture capital exits. The two major forms of exit observed in venture capital are initial public offerings (IPOs) and trade sale. Typically, a PCP stake is converted into common equity during an IPO exit but not converted in case of trade sales. We develop a model where VCs can signal the quality of their venture by costly conversion. We show that PCPs have the required features to implement the signalling mechanism. VCs signal by converting their PCP stake into common equity, when they exit from the venture and in the process give up some of their cash flow rights. We show that this can also help in alleviating the problem of entrepreneurial effort. Finally, we derive empirical implications for the two forms of exit. The second and third chapters are concerned with corporate governance. Firstly, we examine the effectiveness of the "comply or explain" approach to corporate governance in the UK. Using a unique database of 245 non-financial companies for the period 1998 - 2004. we perform a detailed analysis of both the degree of compliance with the provisions of the corporate governance code of best practice (Combined Code), and the explanations given in case of non-compliance. We rank the quality of explanations based on their information content. We find an increasing trend of compliance with the provisions of the Combined Code, but also a frequent use of standard and uninformative explanations when departing from best practice. We then use this data to analyse the extent of moral hazard problem in different groups of companies and the role of monitoring in alleviating it. The third chapter extends the above analysis. We use the dataset to identify well- governed companies by accounting for heterogeneity in their governance choices and investigate its association with performance. We find that companies that depart from governance best practice because of genuine circumstances outperform all others and cannot be considered badly-governed. On the contrary, we find that mechanical adherence to best practice does not always lead to superior performance. We thus argue that flexibility in corporate governance regulation plays a crucial role, because companies are not homogenous entities.

Microfinance Institutions (MFIs) now reach 200 million people, mostly women without access to mainstream financial services living on, below and around the poverty line, with offers of small loans. The vast majority have as their twin objectives to alleviate their borrowers’ poverty and to enhance their empowerment. The paradox of microfinance is that a number of the practices used to achieve its objectives have the unintended consequence of undermining them. The concept that links the objectives of MFIs and the dangers in its practices is the relationship microfinance has with a borrower’s autonomy. The MFI intends that the loan increase autonomy by enriching and empowering the borrower. Its practices, however, can easily lead to charges of exploitation, coercion and paternalism, although in the latter case it is also argued that in certain areas they are not paternalistic enough. It is argued that these latter concepts are considered wrongful, when they are, just because of how they relate to autonomy. The structure of the thesis is thus to consider the concepts of exploitation, coercion, and paternalism and then apply these concepts to the practices of microfinance. The thesis concludes with an empirical survey of how far microfinance has in fact achieved its objectives of poverty reduction and empowerment, in order to judge whether the infringements on autonomy incurred in its practice can be justified. It then considers the extent to which the way the benefits and burdens of microfinance fall - those whose lives do indeed go better or worse after engaging with microfinance, and by how much - affects our judgement as to whether microfinance should be supported. Finally suggestions are made as to changes to practices that could be made so as to keep the pursuit of the ethical objectives, but minimise the risk of unethical practice in fact.

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The present study is an attempt in applied research to examine the growth of the public sector in a developing economy. All the analysis, from the collection of the original data and its treatment, has been directed towards the determination of the factors which contributed more significantly to that growth, and to establishing its relations with the historical (economic, political and social) events in a particular country: Portugal. In the end, an interpretative scheme had to be evolved to explain the phenomenon observed. However, apart from the relations which emerged, and the value of the explanations advanced, there is a service for which we believe we can lay claim; that of having taken the pains of collecting; and grouping the thousands of items of the Portuguese government accounts since the beginning of the century in categories suitable for the analysis of the economist; and this did not represent the minor effort in our task. Such a work had not been undertaken before, and no similar study, even of a smaller coverage, or for a shorter period of time, existed. We hope it will contribute to throw some light into the process of the transformation of the Portuguese economy during the last six decades. In presenting the data for the period aftex- 1930, it has "been possible to find in an almost adequate form, a breakdown of the expenditures of the central government into economic aim functional categories, in "Estatisticas Financeiras" - a publication of the National Institute of Statistics. For the period up to 1930, we had no other solution but to go through the two annual volumes of the original accounts of the state, which in their :,ld form, and in the expression of the legislator who reformed them, "cost one thousand escudos, weight 12kg., have thousand pages, and nobody reads them". In addition to that, many data on expenditures which, by every meaningful criterion or definition of the public sector belonged to that sector, but due to administrative or some other reason had been excluded from the formal structure of the "unitary" budget and remained scattered through a series of publications and reports (or not published at all), had to be collected separately or obtained from the archives and through kind co-operation of the bodies concerned. Now they are, at least, put together and systematically classified. If the interpretations can be challenged, we hope that the result of this effort of classification will remain, inviting new explanations and further research. The first step has been done.

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