This thesis investigates the motives behind merger decisions taken by five major Japanese banks in Summer 2004, the implementation process and results of their merger decisions. It provides fresh theoretical and empirical insights into the major Japanese banks and their corporate strategy, showing how banking supervision and globalisation facilitate bank renewal. This thesis addresses the limitations of existing theory of merger motives through the presentation of a detailed analysis of empirical data. The case of UFJ Bank is investigated by means of comparative research methods combined with multiple levels of analysis, using the survey of relevant banks, case studies, and accounting studies. This research also addresses problems inherent in quantitative analysis, stemming from the financial statements of large international banks. Thus, this study proposes a new approach to assess post-merger performance. Among the various motives behind the merger decisions, the data show that the desire to become the number one in the marketplace is the strongest motivating factor; thus the pursuit of increased size and market share through M&As becomes a top priority of corporate strategy. For the implementation process of merger decisions, the data reveal that Japanese bank M&A practices differ from Western practices, despite globalisation is in progress in corporate strategy. As for the results of the merger decisions, the data provide reasons why M&As involving large banks gain little efficiency improvement immediately after the merger. These new insights and analytical approach make contributions to knowledge and methodology, as a horizontal comparative analysis is proposed as opposed to a traditional vertical historical analysis. This enables researchers to achieve more realistic results of post merger performance studies. Future research could analyse the situation 4-5 years after the merger when merging larger banks may begin realising synergy benefits.

The objective of this thesis is to investigate various extensions to Vasicek's (1987, 2002) regulatory Gaussian credit risk model for improving current credit risk management practices. The thesis first provides a comprehensive review of Vasicek's (1987, 2002) Gaussian structural model for the distribution of credit portfolio losses, its theoretical extensions and the empirical applications in the literature. This is followed by four empirical studies. My first empirical study examines the impact of skewness and excess kurtosis of the asset return process on the shape of the credit loss distribution and, consequently, over the Basel II requirements. My second empirical study investigates the combined impact of contagion across economic sectors and a non-Gaussian common factor on the shape of the credit loss distribution. My third empirical study contains a Monte Carlo study of the robustness of the probability of default and asset correlation estimators of the Basel II Gaussian model when the true loss data generating process follows a non-Gaussian asset return process. Finally, I investigate the accuracy of the correlation parameter prescribed in Basel II for US and Mexico

This thesis consists of three essays that examine the information content of sovereign credit default swap (CDS) prices in the context of credit risk pricing in emerging markets. In particular, its focus is in two areas: (i) the relationship between sovereign CDS and bond markets, and (ii) the impact of credit rating announcements on sovereign CDS and bond prices. The first essay examines the information transmission and price discovery process in sovereign CDS and bond markets. It assumes the existence of an arbitrage relationship between CDS and underlying bond instruments, and employs the vectorerror correction model (VECM) for cointegrated markets. Results suggest that over the sample period considered (2003-2006), the bond market appears to informationally dominate the CDS market. This finding is in contrast to studies examining corporate credit risk markets. However, the essay documents that the CDS market's contribution increases substantially when weekly as opposed to daily data is utilized, indicating that potential asynchronous data timing issues have an impact upon the results. In the second essay, the focus is on a dynamic aspect of the price discovery process in sovereign CDS and bond markets. Extant studies of credit risk markets assume that the parameters governing the information transmission process are constant. I employ a number of econometric methods in testing for possible variations in price discovery process, including structural break tests, smooth transition models, dummy variable analysis, and other extensions of the VECM. The information transmission is found to be dependent on the short-term behaviour of credit spreads, and correlated with the liquidity of the CDS market. Results suggest an increasing importance of the CDS market relative to the bond market in the price discovery process over the sample period. The third essay analyses the price impact of sovereign credit rating announcements on sovereign credit risk markets. It employs an event study framework to examine whether there is: an anticipation of the forthcoming announcement in sovereign CDS and bond prices; a price impact on the announcement day; and a delayed reaction. The essay documents an asymmetrical reaction: the price impact of negative events is more significant. Results suggest that the price impact in CDS and bond markets differs, and depends on the event type and the credit quality of the sovereign entity.

In this thesis, we formulate a quasi-analytical solution method for determining the timing boundary for multi-factor real option models, and apply it to economic problems of re-investment having a fixed re-investment cost. In the absence of an eligible dimension reducing transformation, numerical solution methods are normally used to evaluate the timing boundary, but analytical methods are elegant and less onerous. We develop a quasi-analytical method for determining the timing boundary for models whose factors are described by geometric or arithmetic Brownian motion processes, which, because it is expressed as a solution to a set of simultaneous equations, is implicit. Fixed cost re-investment problems, with two or more factors, are a particularly appropriate vehicle for demonstrating the appeal of the quasi-analytical method, because of the complete absence of a dimension reducing transformation. We find that the standard finding for one-factor models on the viability condition for investing in an opportunity is extendable to the multi-factor models by showing that the net incremental value rendered by the re-investment has to significantly exceed the net re-investment cost for it to be economically justified. Although the various models are founded on an infinite re-investment chain, we observe only finite chains for many industrial and commercial assets, so a recurring theme of our studies is abandonment and the inclusion of a suitable mechanism in the formulation for terminating the infinite process. Three distinct classes of re-investment are considered. In Chapter 3, we study the two-factor renewal model, with deteriorating stochastic revenue and operating cost. We find that the correlation between the two factors exerts considerable control over the shape of the timing boundary, which shows that focusing exclusively on one-factor models and ignoring additional factors can produce misleading results. Further, the timing boundary is more greatly influenced by the revenue reversionary level than by the .operating cost reversionary level and the re-investment cost. We also consider the magnitude of the reversionary revenue required to terminate the chain. In Chapter 4, we study a replacement model with stochastic escalating cost and tax allowances due to the depreciation charge, based on declining balance, straight line and sum of year's digits schedules. Replacement depends on asset age, with younger assets being replaced at lower operating cost thresholds. Further, asset age is critical in deciding the preferred depreciation lifetime, tax rate and depreciation schedule. In Chapter 5, we study the impact of salvage value on replacement. The presence of this additional factor not only . lowers the operating cost threshold, but also permits the abandonment decision to be modelled. In Chapter 6, we study a two-factor model for renovating a property, with building quality deteriorating stochastically and a market-based rental price, which expresses both renovation and abandonment opportunities. We show that the three decisions of continuance, renovation and abandonment comprise an exhaustive decision space. 12

The aim of this research is to investigate how the failure of the members of the EMU to uphold the goals of the Stability and Growth Pact (SGP) has affected the Euro sovereign bond markets and its ability to enforce market discipline. To date 7 of the 11 member states of the Euro zone have violated the principles of this pact, and yet the bond market has shown little appetite to punish those with high deficits and national debts. The danger going forward is that each country will find ways to justify growing fiscal deficits, contented in the knowledge that there will be no formal pressure from other EMU countries and that the interest rate burden will be the equivalent for all EMU countries. Thus, there appears to be an element of "free-riding" by those governments who feel there is an unwritten bail-out in the workings of the system (despite official pronouncements to the contrary). Therefore my research investigates whether monetary union has weakened the disciplinary function of the Euro debt markets. To this end, I carried out an investigation of the microstructure of European bond markets, and in particular the effects on Liquidity risk with the introduction of electronic trading. There is clear evidence that increased transparency has benefited the bond market by increasing liquidity and thereby reducing liquidity risk. Building a testable model I place the "liquidity risk premium" in its historical context and highlight the dominant role of credit risk in explaining the yield differential with the eurozone. I expand on the research carried out by Cantor and Packer (1996) on the determinants of sovereign's yields and apply their model to the members of the eurozone. This shows that one of the two pillars of the SGP, government deficits, is almost completely ignored by the market in assessing sovereign risk. Instead, GDP per Capita and Debt/GDP seem to be the main drivers in determining the yield of a sovereign. Also, in contrast to Cantor and Packer results, where the yield curve increases in a convex shape as the risk ofdefault increasest,h e eurozonec urve is much more concavei n nature,w hich agreesw ith my "free-riding" hypothesis. Building on the research carried out by Dunne, Moore and Portes (2006), I employ cointegration to model the inter-relationships between different issuer bonds. However, rather than look for a benchmark issuer, I use the model to explore the common regional drivers and investigate the systemic effects that resemble a tacit "bail-out" condition. I show that the regional effect dominates the individual or country specific risk within the bond market. This shows that investors see the eurozone as a single bloc rather than as separate issuers individually responsible for their own debt. Using an Error Correction Model I investigate the short-run dynamics of bond yields and relate these to the underlying fundamentals of the respective issuer, with low risk issuers having higher speed-of-adjustments than high risk sovereigns. This corresponds to investors views of the 'core members' eg. Germany, France etc. are more homogeneous than and the 'outer members', Italy, Greece, Portugal etc. In conclusion, my research shows that there are significant issues of "free-riding" within the eurozone bond market and it is still far from efficient.

This thesis examines the relationship between exchange rate changes and stock returns, focusing on six Middle East and North African emerging markets: Egypt, Kuwait, Morocco, Oman, Saudi Arabia and Turkey. The aforementioned relationship is explored at different levels of aggregation for the stock market (from country to finn level). Three papers are presented in this thesis. The first paper considers the linkage between stock prices and exchange rates in four Middle East emerging markets. In contrast to the existing evidence that uses a global market index to uncover such a relationship I find that for my sample countries oil prices emerge as the dominant factor in the above relationship. I consider the presence of regime shifts and I find evidence of cointegration only'for the period following the 1999 oil price shock. Readjustment towards equilibrium in each stock market occurs via oil price changes. Finally, I perfonn a number of robustness checks and produce persistence profiles. In the second paper, I examine the presence of volatility spillovers between nominal exchange rates and stock returns in three MENA countries: Egypt, 'Morocco and Turkey. The multivariate GARCH model which I use does not produce evidence of cross-market effects for the general stock indices returns. Nevertheless, bidirectional shock and volatility spillovers between exchange rates and sector stock returns exist at the industry sector level. Those findings are more pronounced in Egypt and Turkey. The different results are due to the different exchange rate regimes/policies adopted by the three countries. While exchange rates in Egypt and Turkey were allowed to float, Morocco followed a more tightly managed exchange rate regime. The third paper tests for the impact of announcing floating and devaluating the exchange rate on stock returns in three MENA countries namely, Egypt, Morocco and Turkey_ I, first, use the event study methodology put forward by Hilliard and Savickas (2002), testing for eventinduced, abnonnal volatility in the stock returns. I, then, use three different methodologies to testfor abnonnal returns. These are, first, the approach given by Brown and Warner (1980), and the remaining two, which control for event induced volatility, are based upon the study of Boehmer. Musumeci and Poulsen (1991), and upon the method fonnulated by Savickas (2003). I find clear evidences of abnonnal volatility and abnonnal return due to this event in Egypt and Turkey. but I could not find such evidence in Morocco

The research question of this study is whether or not companies can improve the relationship with their investors by voluntarily extending the scope of their risk disclosure. The novel aspect of this research is that it analyses the relationship between companies and investors in a unique crisis situation. This thesis explains and tests the relationship between listed European insurance groups that disclose risk information in their annual financial statements and the reaction of the capital market during the recent sub-prime loan crisis. It covers the disclosure periods 2007 and 2008 of thirteen insurance groups that file their financial reports according to International Financial Reporting Standards (IFRS). Based on literature it is assumed that during a crisis situation investors estimate the value of the company they have invested in and decide whether or not they sell their shares or hold on to them. Research studies indicate that investors demand company-specific information about the investment risk, measurement of financial instruments and forecasts that are up to date and specific to the crisis situation. To analyse the relationship between listed companies and investors the thesis measures their disclosure performance and the capital market response towards it. A self administered risk disclosure performance index is used that is based on accounting disclosure requirements and specified to the crisis. It measures the discretionary disclosure of companies about mortgage portfolio-based financial instruments. These instruments caused financial distress of banks that spread to a global economic crisis. The thesis measures the reaction of the capital market towards the disclosed risk information by applying the event study methodology at the peak of the crisis situation. The statistical analysis of the relationship indicated that voluntary risk disclosure is not well recognized by investors as reported in the literature. It found out that investors had recognized those listed European insurance groups that have been most severely affected by the financial crisis. Investors came to that conclusion even before the researched companies disclosed risk information about their financial instruments in annual group financial statementsThe statistical research has been extended using structured-interviews with experts that represent significant users of financial information. This qualitative approach seeks to verify and explain the statistical results. The results of the interviews with professional users of financial information such as financial analysts, managers of rating agencies and bankers have shown that they do not depend on risk information from annual financial statements of respective companies. They seek to get risk information in the event of a crisis by directly addressing the management of insurance groups. This enables them to gain comments on the impact of upcoming problems in the financial market from these managers. These results imply that theories about the relationship between disclosing companies and the capital market are different in crisis situations when psychological factors influence the behaviour of both companies and the capital market. These factors are difficult to separate and need further research. Practical implications of this research study arise for regulators and standard setters. Regulators should be aware that communication between management and professional users of financial information exists that exclude private investors during a crisis situation and deprives them from company-specific and recent information. This information disadvantage of private investors is amplified by the difficulty to understand the business model of the insurance industry. Therefore detailed and understandable information that explains the aftermath of the financial crisis on the insurance company should be made freely and promptly available. Regulators should require the insurance industry to do so because their discretionary risk disclosure is not sufficient to enable private investors to make snap-shot financial decisions. Based on the evidence that insurance groups have hesitated to disclose their risk positions during a crisis, it is questionable whether they will comply with upcoming financial standards that require the disclosure of sensitive data about the fair market values of assets and liabilities. These data can be considered equally sensitive to listed insurance groups as information about their risk position on financial instruments. Such hesitation may be critical in other crisis situations when discretionary disclosure is necessary from an investor point. Accounting requirements cannot add the necessaryinformation because they cannot be modified quickly enough to force companies to disclose risk information that is critical in each individual crisis. Regulators and accounting standard-setters should not rely on listed European insurance groups disclosing sufficient risk information during a crisis voluntarily. They should enhance incentives for insurance groups to disclose information about their risk position to create a level playing field between institutional investors with easier access to crisis relevant information and private investors that lack such information in crisis situations. Investors should reward discretionary risk disclosure of companies by investing in them.

This thesis addresses the independence of bank supervisory agencies and its effects on bank soundness in industrial countries. It tackles the following underresearched questions: whether and, if so, to what extent delegation to independent bank supervisors strengthens banking systems; what forms delegation arrangements take: and \\ hich politico-institutional and banking market conditions affect the etTecti\ eness of delegation. The study isolates theoretically and empiricall) the role of agency independence as a source of credibility in banking supervision. The quantitative analysis builds on a new cross-sectional data set on legal bank supen isor independence from government and industry in OECD countries. The qualitative anal) sis opts for a two-country (the UK and Japan), two-period (1980-1998 and 1998-2006) case study framework. The Bank of England, the Ministry of Finance of Japan. and their respective successor bodies, the Financial Services Authority and the Financial Services Agency, are strongly differentiated according to their independence profile. The thesis offers qualified support for independence as a prerequisite for effective banking supervision, in line with the virtually untested policy prescription contained in the Basel Core Principles. Quantitative evidence suggests that higher bank supervisor independence from government enhances bank soundness, and does so the more prevailing is the rule of law. Delegation is more effective in bank-centred, less concentrated financial systems. Legal independence is rarely complete, suggesting that countries have a variety of models of partial delegation to choose from to suit their particular accountability needs. Qualitative evidence provides further support for the beneficial effects of delegation. It suggests that \vhile legal independence from industry is not a necessary condition for bank soundness, supervisory capture, at least above some critical thresholds. is c1earl) detrimental. The transmission mechanisms between independence and bank conditions are discllssed, including the possibility of two-way causality .

We investigate the contribution of microstructural factors in the formation of commodities prices, using a completely new set of intra-daily data from the London Metal Exchange (LME). We chose the LME because its interesting structure allows the comparison of three alternative trading mechanisms: (i) The Inter-Office telephone market; (ii) Two daily sessions of floor market; (iii) The electronic trading platform (since 2001). The thesis begins with a review of the literature on market microstructure (Chapter 1), followed by a detailed description of the structure of the LME (Chapter 2). We then move to the empirical evidence from the LME. We first focus on the comparison of decentralized and floor trading systems (Chapter 3). For this purpose, we use a data set relative to the period February - April 2000, before the introduction of the electronic system. We find that the trading mechanism affects volume, volatility, spreads, price discovery and metals relationships. We investigate the robustness of these results, in a different period: February - May 2006 (Chapter 4). Since October 2000, there has been an extension of the floor's opening times: we find that this has an impact on market variables. We also compare the traditional and electronic market, LME Select, launched in February 2001 (followed by an updated version in 2003). We find that there is more trading activity and price discovery on LME Select, but LME Rings still concentrate a large amount of trades, and spreads are smaller. As a consequence of these structural changes, overall trading activity has increased since 2000, and spreads have lowered. In the final Chapter (Chapter 5), we model a computer-simulated environment to investigate the impact of trading mechanisms from a different angle. The results confirm the empirical findings that price properties are affected by the trading system.

In recent years, mortgage markets in the UK have undergone substantial structural change. One important result has been that households are, generally, no longer facing situations of mortgage rationing, whereas for most of the post war period, mortgage queues were commonplace. Although regime switching between rationed and unrationed periods has important implications for the housing market and for the economy generally, the techniques currently available for analysing these implications are limited. The thesis has three aims: (i) it proposes a new, relatively simple way of estimating directly separate mortgage demand and supply functions and hence the extent of mortgage rationing. The approach is capable of taking into account regime shifts and yet does not require disequilibrium estimation techniques. The proposed measure covers the period 1963-1984, conforms closely to a priori expectations and shows clearly the regime shift in the early eighties. (ii) an econometric model of building society behaviour and the housing market is constructed, which demonstrates the importance of the new measure of rationing. (iii) the thesis then examines the impact of the ending of rationing on both building societies and on the personal sector. In the latter case, the effect on housing and asset accumulation decisions is taken into account. The model is also used to examine quantitatively the importance of policy changes under conditions of rationed mortgage supplies relative to the situation in which mortgage supplies are unrationed.