Factor analysis has contributed imperatively towards solving the dimensionality problem and identifying the underlying factor structure governing term structure of interest rates. The estimated latent factors are known as level, slope, and curvature. These factors can be estimated using Principal Component Analysis (PCA) or Nelson-Siegel (1987) framework as reparameterized by Diebold and Li (2006). The two statistical methods have been shown to produce the same three factors. The thesis contributes towards testing of level, slope, and curvature factors extracted using the statistical models. We investigate the issues of stability in the eigenspace variables governing level, slope, and curvature. We develop a stability testing procedure to examine the presence of significant structural changes in the latent factors estimated using PCA. Bootstrapped critival values have been employed in order to draw inferences. Monte Carlo evidence suggests good finite sample size and power properties of the tests. Empirical test results on zero coupon bond yield curves show significant structural changes in factors. Further, we propose some extensions to estimating level, slope, and curvature factors for term structures where the interest rate maturities are coupled together into dependence clusters. In this, we extend the Nelson-Siegel (1987) framework to the case of modelling yield curves with correlation clusters. We identify the short maturity and long maturity clusters governing the term structure and propose a block dynamic representation to model the factors. We find that the proposed model generated superior forecasts than the benchmark model proposed by Diebold and Li (2006).

The dissertation aims at the further understanding of several critical issues in the stock markets. It contains four chapters. Cross-sectional stock returns and asset pricing has been one of the most important areas in financial economics. With the empirical failure of the Capital Asset Pricing Model (CAPM), an increasing number of studies have been conducted in the US stock market, and consequently many alternative asset pricing models and factors, have been proposed. Chapter One investigates the role of liquidity risk in cross-sectional asset pricing in both the USA and the UK. This study finds that a liquidity-augmented CAPM explains asset returns. Liquidity explains a sizeable spectrum of cross-sectional stock returns; and its effect is robust in the presence of other well-known empirical factors and a range of macroeconomic factors. Given the influential work of Fama and French (1992 and 1993), the performance of size and value premiums, (i.e., the excess return of small-capitalization stocks over large-capitalization stocks and the excess return of high book-to-market over low book-to-market stocks) are also compared. It is found that value premium is robust while the size premium disappears in the data for both countries. Chapter Two investigates the relationship between liquidity and beta, as this relationship has been given little attention in the literature. Using the illiquidity measure of Amihud (2002), Acharya and Pedersen (2005) show that liquidity is priced in the framework of CAPM, and illiquid stocks have higher betas. Thisstudy, however, provides empirical evidence that Amihud’s measure is highly correlated with firm’s size, and the results of Acharya and Pedersen (2005) could be spurious because of inappropriate choice of liquidity proxy. Using the size-free liquidity measure proposed in this study, it is demonstrated that liquid stocks have higher betas. This is consistent with the model of Holden and Subrahmanyam (1996), in which risk-averse investors resist holding risky (high beta) stocks. As a consequence, they trade risky stocks more often than low beta stocks, thus increasing the liquidity of high beta stocks. The evidence that illiquid stocks have low betas while still commanding higher returns implies that liquidity is priced in a multifactor, rather than CAPM, framework, which is consistent with the work of Brennan and Subrahmanyam (1996) and Pastor and Stambaugh (2003). In Chapter Three, many different factors proposed in the cross-sectional asset pricing literature are reviewed; and it is argued that the number of factors in the literature seems to be too large, as suggested by the Arbitrage Pricing Theory (APT). It is hypothesized that all the existing factors cannot be mutually exclusive and/or equally important, thus there must be redundant factors. More importantly, many of the successful factors are not well economically or theoretically motivated. For example, there is still no consensus on the underlying risk of the well-known Fama and French factors. Last but not least, many of these successful empirical factors suffer in terms of the data-mining critique of Lo and MacKinlay (1990). In this study, a total of 18 factors are assembled and categorized into three groups: five risk-related, eight firm characteristics and five APT motivated principal component factors. Individual stocks rather than portfolio returns are used in testing factor models to avoid the data-snooping problem. The results suggest a risk-related four-factor model can serve as a replacement for the controversial Fama-French and momentum factors. More importantly, the four factors, i.e., excess market return, co-skewness, downside risk, and liquidity, are economically and theoretically better motivated than the firm-characteristics based factors. It is also found that many of these firm-characteristics sorted factors are not pervasive in explaining individual stock returns. It is, thereforeconcluded that most of the factors are redundant and may be the outcome of data-mining. Chapter Four examines the cross-sectional effect of the nominal share price. This chapter endeavours to understand two interesting puzzles associated with share price. First, the nominal share prices of the US stocks have remained remarkably constant since the Great Depression despite inflation. Second, there is no consensus about the motivations for firms to split their stocks, since financial theory suggests share price is independent of its value. The findings indicate that share price per se matters in cross-sectional asset pricing: stock return is inversely related to its nominal price. It is shown that a strategy of buying these penny stocks can generate a significant alpha even after considering the transaction costs. The abnormal returns of these penny stocks are robust in the presence of other firm characteristics such as size, book-to-market equity, earning/price ratio, liquidity and past returns; and are also not explained by the existing factors. These results also cast some light on the stock-split phenomenon. Intuitively, if firm managers know that low price would generate higher future returns, they are more likely to split their stocks on behalf of shareholders. This thesis makes several major contributions in the area of cross-sectional asset pricing. First, it highlights the importance of liquidity risk in the financial markets. For example, Chapter One and Three suggest the robust significance of liquidity risk in both the UK and US stock markets. Second, this study investigates the interaction between liquidity and other well-known factors in asset pricing. For instance, the well-documented value premium can be explained by liquidity risk (Chapter One), by the close link between liquidity and beta (Chapter Two); and by the close association between liquidity and size, share price and other factors (Chapters One to Four). Third, this study addresses the issue arising in the asset-pricing literature regarding the number of factors used in explaining asset returns. Chapter Three concludes that many of the existing empirical factors are not pervasive and may be the outcome of data-snooping as a result of grouping. Consequently, this chapter indicates that a theoretically betterjustified four-factor model, comprising excess market return, co-skewness, downside risk and liquidity, is competent to explain stock returns. Last but not least, this thesis also challenges the Efficient Market Hypothesis. Chapter Four demonstrates that investors buying low price stocks (penny stocks) and selling high price stocks can generate significant profits, and rational asset-pricing models cannot explain this abnormal return. Nevertheless the inverse relationship between share price and return does shed some light on stock split motivations. The results of this thesis, suggest a number of future research projects. For example, most of the academic work on cross-sectional returns and asset pricing are accomplished for the major developed markets such as the UK and US. With the maturation and growing importance of emerging markets, it is feasible to test asset pricing hypotheses in these markets. The extent to which these hypotheses are validated in the emerging markets would significantly impact both academia and practitioners

The thesis describes and analyses key events in the history of the pioneering markets for financial derivatives, paying particular attention to the influence of the Black-Scholes mathematical options pricing model on the formation of the markets. The historical narrative, focusing chiefly on the Chicago Board Options Exchange (CBOE), describes the transformation that markets for agricultural commodities underwent as organised trading in financial options was designed and practiced. Drawing on theoretical frameworks from economic sociology and from the sociology of science and technology, the thesis aims at expanding the explanatory scope of sociological accounts on markets. The work presents a new perspective for the understanding of today's financial markets: a multifaceted analytical description that combines the social, regulatory and organisational aspects of these institutions. After an introductory chapter, a literature review and a discussion of methodology, the empirical material of the thesis is presented in four chapters. Chapter 4 describes the regulatory approval of CBOE. The chapter examines the initial stages in the development of derivatives markets and analyses the effect that the Securities and Exchange Commission (SEC), the American financial regulator, had on the sociocultural process through which financial markets evolve. The analysis shows that the entrepreneurial setting in which derivatives contracts were situated allowed regulators to use them as a source for political power. Chapter 5 reveals the influence that the culture of the Chicago agricultural commodities markets had on the formation of the financial options market. The case describes the cultural roots of the competitive market maker concept, and the part that this concept played in the introduction of the Black-Scholes options pricing model to the organisational structure of derivatives' exchanges. Chapter 6 is devoted to a detailed description of the practices through which the Black-Scholes model was incorporated into the organisational infrastructure of the options market. This process, as the chapter shows, played a significant part in the construction of the model's validity and credibility. Chapter 7 focuses on the inter-agency regulatory struggle through which index-based derivatives were conceptualised and approved. Building on the cases analysed in the four chapters, the discussion part of the work presents and illustrates the concept of techno-social market networks - the interrelated sociotechnical institutions within which price-constructing mechanisms are maintained and operated.

No description available.

As the study of financial crisis and contagion becomes increasingly important in both academia and practice, this thesis aims to measure financial crisis and contagion with a new concept "risk appetite"; and a relatively new dependence measure, copula. It also studies the role of liquidity in the global financial markets, especially the role of liquidity during the financial crisis period. This topic is becoming especially important, as evidenced by the recent incident of Northern Rock. To measure the investors' perceptions and examine the changes of their perceptions during extreme events, I have constructed one world and three regional risk appetite indices following the method of CSFB. Unlike risk aversion, risk appetite reflect short term fluctuation of investors' attitude about risk taking. With these risk appetite indices, I find that different regions behaved differently when hit by extreme events. In general, it took a longer time to restore investors' confidence after a drastic change of economic fundamentals compared with terrorist attacks. The second study that uses copula to test for contagion closely follows the study by Forbes and Rigobon (2002) on the same issue. Three versions of copula dynamics are used. We find strong evidence of an increase in dependence between stock market returns during the Asian financial crisis, contrary to the findings in Forbes and Rigobon (2002). The third study examines the role of liquidity in the financial markets and the relationship between funding liquidity and market liquidity. Using the Amihud (2002) liquidity measure, I have constructed market-wide liquidity measures for 37 stock markets. I find volatility to be a very important driving factor for market illiquidity and stock market illiquidity condition has a tendency to persist. I also find that Regional and the U.S. stock market returns do not affect local illiquidity. Regional and the U.S. stock market illiquidity shocks, on the other hand, affect local illiquidity. However, the greatest impact on local market illiquidity comes from the local market return. Illiquidity shock in the Hong Kong stock market has a greater impact than its stock market return on the other markets liquidity during the Asian crisis. This impact was shown to be stronger than that during the non-crisis period. Hence. contrary to common beliefs, illiquidity does not cause extreme returns and stock illiquidity, and not stock return that propagates.

This research's aim is to describe the particular features of the venture capital investment process, criteria venture capitalist use to make investment decisions, the deal structure, and post-investment management support in formal terms. Based on these we develop, apply, and validate a real options valuing model against a sample of venture investments made contemporaneously with the research. Venture capital fills a niche in the financial markets by supplying capital to high risk, high growth, entrepreneurial managed and controlled unquoted companies. At the stage venture capitalists invest, many of these companies are unsuitable for raising capital by means of traditional bank finance or public equity markets. It is reported that venture capitalists provide a high level of management support along side capital in an attempt to improve risk reward performance of portfolio investments. A specialised system of governance set forth in the shareholding agreement is reported to align the interests of all parties and to provide for venture capital control a key stages in the process. Venture capitalists generally undertake a lengthy review of the entrepreneur's background and credentials, composition of the management team, and characteristics of the target market prior to investing. The quality of the entrepreneur is reported to form the basis of most investment decisions. Quantitative corporate finance tools often do not feature in the review process. Enterprises of the type that attract venture capital often adopt contingent investment strategies to deal with the high level of risk that is characteristic of an enterprise attempting a several factor growth transformation. It is suggested that venture capitalists' review of an enterprise's contingent investment opportunities represents the core of investment decision-making. Discounted cash flow methods may not be well suited for evaluating contingent investment opportunities. Real options theory has been suggested as a means to analyse this value, however in a venture capital situation it may not be possible to model the process with the level of precision required for quantitative real option tools. The research develops an alternative qualitative real options valuing model based on decision criteria featured in the venture investment evaluation process that may signal real option value. Ten case studies are presented of venture capital investments and private equity· investments representative of venture capital situations made contemporaneously with the research. We report the criteria put forward by investors as the basis of investment decisions. We also report capital arrangements and subsequent investment and enterprise operating performance. We represent the processes encountered as a subjective evaluation of real option value. We suggest that the proposed real options valuing model reflects decision criteria, effectively screens prospective investments, provides the same broad ranking as formal quantitative models, signals real option value, and may also contain additional information. We estimate the value of a real option in one of the case studies. we suggest that venture capitalists' post-investment management support is an attempt to Increase option value, and the deal structure provides for greater venture capital control of and proportional claim to an enterprise's real options.

The bookbuilding method for taking companies public has been at the centre of public debate. The scandals regarding share allocation of heavily underpriced offerings in the US in the late 1990s and 2000 revealed that underwriters used their allocation discretion in exchange for their own interests through unfair practices. This discretion, as emphasized by Benveniste & Spindt (1989) and Benveniste & Wilhelm (1990), can benefit the issuing firms. In pricing the issue, by favouring regular investors who provide information, underwriters can reduce the average underpricing, and therefore increase the expected proceeds for the issuing firms. In this study, we use a unique dataset of hybrid bookbuilding offerings listed between Jan 1993 and Dec 2003 on the Main Board of the Hong Kong Stock Exchange. The dataset makes it possible to study the pricing, allocation and information distribution among investors during the bookbuilding process by using publicly available information. We find that the institutional demand, as a proxy for private information during the bookbuilding period, is the factor that most affects underwriters' decisions in the pricing process. The importance of this information in determining the final offer price demonstrates the role of bookbuilding as an information extraction mechanism. A significant positive link between initial returns and the price revision confirms the existence of the partial adjustment phenomenon whereby underwriters price the issue below the full information price to allow institutional investors to be compensated via underpricing. We show that institutional investors are given a distributional priority as they take up a larger proportion of the IPO shares with an initial average of 86.S6% and final average of 77.30% after the clawback provision is exercised. However, there is little evidence that they are favoured by underwriters since there is no significant difference in the size of the initial allocations that institutional investors receive in underpriced and overpriced issues. This is partially consistent with the findings of Pons-Sanz (200S) on initial allocations in Spanish hybrid bookbuilding offerings. The standardised clawback provision enforced by the regulator lowers the final allocation to institutions and accordingly their profits in underpriced IPOs. The final institutional allocation reduces to 80.77% (median 8S.00%) in weak IPOs, 79.21% (median 8S.00%) in normal IPOs, and 72.42% (median 72.72%) in hot IPOs. The result is contrary to the empirical evidence documented by Aggarwal et al. (2002) and Pons-Sanz (200S), and deviates from Rock's (1986) model, where institutions concentrate on more underpriced IPOs while leaving "lemons" to retail investors. Given that the institutional demand is higher in hot issues and lower in weak ones, institutional investors are informed. The results can be interpreted as reflecting Hanley and Wilhelm's (199S) argument that institutional investors participate in both cold and hot IPOs in order to receive allocations in future IPOs.

This study develops an econometric model of limit-order completion time using survival analysis. Time-to-completion for both buy and sell limit orders is estimated using tick-by-tick UK order data. The study investigates the explanatory power of variables that measure order characteristics and market conditions, such as the limitorder price, limit-order size, best bid-offer spread, and market volatility. The generic results show that limit-order completion time depends on some variables more than on others. This study also provides an investigation of how the dynamics of the market are incorporated into models of limit-order completion. The empirical results show that time-varying variables capture the state of an order book in a better way than static ones. Moreover, this study provides an examination of the prediction accuracy of the proposed models. In addition, this study provides an investigation of the intra-day pattern of order submission and time-of-day effects on limit-order completion time in the UK market. It provides evidence showing that limit orders placed in the afternoon period are expected to have the shortest completion times while orders placed in the mid-day period are expected to have the longest completion times, and the sensitivities of limit-order completion time to the explanatory variables vary over the trading day.

No description available.

This thesis reviews the theory and evidence on bank lending to companies and uses an event study to test the hypothesis that banks obtain inside information about borrowers. The argument is that a stock market response to announcements concerning bank loans indicates that banks do obtain inside information, which is signalled by the announcements. US event study evidence supports the information hypothesis for smaller quoted companies but not larger ones. This study is the first to use UK data and the results show less response to loan announcements than in the USA, which is consistent with other evidence that banks in the UK do not, as a rule, obtain inside information about large borrowers. It is important to test the information hypothesis because the established view of the rationale for bank lending assumes that it is true. There are several reasons why more information would give banks an advantage and enable both the average cost of their loans to be lower and the cost of each loan to reflect the risk of the borrower more accurately. But as the evidence indicates that banks do not have an information advantage for large borrowers, it is suggested that their lending in these cases is better explained by the service and commitment they can offer and by their capacity to negotiate with companies in difficulties. Bond investors are as well informed as banks but are not organised to cope with bad debts, which explains why the eurobond market is restricted to very safe issuers. This is believed to be the main factor limiting the development of markets in corporate debt. The thesis includes a brief history of the financing of business in the UK which establishes that securities markets have been an important source of funds for quoted companies since the 1920s and that banks have not been involved in corporate management or ownership since the mid nineteenth century. There is also a comprehensive review of event study methods which demonstrates their surprising diversity and justifies the choice of method for this study, which is believed to be the first in the UK to use daily data throughout.