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The apparent predictability of stock return following an earnings announcement is a persistent and well-documented anomaly that seems to be in conflict with the market efficiency hypothesis. It remains uncovered to date. This thesis investigates the relation between the post-earnings-announcement drift anomaly and liquidity over the period 1972-2004. The results show that liquidity is fundamentally associated with the post-earnings-announcement drift.Management and Business Studies

The issuance activity of IPOs and rights issues has shown substantial time-varying fluctuations. These fluctuations are conceptually related to the so-called ‘timing, and ‘hot issues’ markets. This thesis conducts a comprehensive examination of the determinants of timing of IPOs and rights issues in the UK, seeking to inspect and compare the main factors that drive these fluctuations. Specifically, I compare the extent to which the favourable business and economic conditions, bull market timing, investor sentiment, and decreasing adverse selection costs can explain these fluctuations. For IPOs, the overall findings show a strongly and robustly significant evidence in support of adverse selection costs hypothesis. Economic conditions, bull market timing and investor sentiment hypotheses are also important determinants of IPOs timing, but of less significance and robustness. For rights issues, the timing story appears different. The empirical evidence is mostly consistent with the bull market timing hypothesis. Investor sentiment proxy is supported but not robustly consistent across various tests. By contrast, the economic conditions and information asymmetry proxies generally exhibited inconsistent findings. It has been recently posited that equity-issuing firms behaviourally time their offerings to exploit stock mis-valuations and investor over-optimism. If so, this behavioural timing is expected to be reflected in a direct relation between mis-valuation of IPOs and right issues and poor post-issue stock returns. This mis-valuation is examined (i) directly via calculating a ratio of the price to an intrinsic value of the firm (as a proxy for relative overvaluation) and (ii) indirectly via looking at the intensity of equity issuance activity since investor over-optimistism and stock over-valuations are expected to substantially differ between hot and cold issues markets. The findings suggest that both IPOs and rights issues are significantly over-valued compared to other non-issuing firms. More importantly, the post-issue stock returns are found to be significantly and robustly different between IPOs and rights issues launched during hot issues markets compared to those launched during cold and normal issues markets, which strongly supports the behavioural timing hypothesis. However, the overall findings derived based on the post-issue stock returns conditional on relative overvaluation are less consistent with the behavioural timing hypothesis.

This thesis investigates the impact of technological and regulatory changes on UK equity market microstructure, and the implications of these changes for policy makers, regulators and market participants. In the first analysis, we model the execution performance of two popular volume participation algorithms. We compare the in-sample fit and out-of-sample predictive ability of two alternative models of execution costs, and find that the non-linear model provides a better fit than the linear model. We also examine the relative importance of different order-specific, stock-specific and market-specific variables in explaining the execution performance of these algorithms. We show that execution risk for volume participation algorithms comprises not just price risk, but also risk due to uncertain trading volumes. The growth in high·frequency trading has been one of the most significant developments in the equity trading landscape, and following a number of market mishaps; has also caught the attention of regulators. In the second analysis, we examine the intraday behavior of high-frequency traders and their impact on market quality. We first observe that high-frequency trading strategies differ significantly from each other in terms of the level of liquidity provision. We next explore the impact of different high-frequency trading strategies on price discovery and temporary- deviations from equilibrium values (noise). We find that all high-frequency traders have a larger contribution towards price discovery m iv ABSTRACT and noise than other traders in the market, thereby amplifying both the beneficial and detrimental components of price volatility. Finally, in the last analysis, we revisit issues related to the liquidity characteristics of limit order markets after Market in Financial Instruments Directive was operationalised in the European Union. We find that the top of the London Stock Exchange's limit order book is extremely thin, and the slope of the limit order book is steep near the top. We further observe that the limit order book contains significant information about future short-term price changes, especially for the less liquid stocks, and this information has economic value in an algorithmic trading environment.

Insider trading is an aspect of financial markets that has attracted and still attracts a lot of attention from academics, practitioners and regulators alike. This thesis is a comprehensive examination of directors' share dealings in the UK. The extant empirical literature on directors' trading can be categorized into two. One, where the event of interest is the directors trade itself and second, where the directors' trades are studied in the context of some corporate event.

This analysis provides evidence regarding the performance of Initial Public Offerings (IPOs) in Europe during a time of dramatic change. For the sample of 973 IPOs taken from the six major Continental European markets and Sweden during 1988-98, there is significant underpricing and autocorrelation in IPO underpricing and activity. Privatization programs account for most of the "money left on the table". For the sample as a whole, we do not find long-run underperformance. Over shorter measurement horizons, IPOs outperform the market. The favourable performance is driven by New Economy IPOs, which account for 28 percent of the sample. The pervasiveness of these results across various methodological choices is puzzling and shows one of the forces behind the dramatic shift in industry composition of IPOs in favour of New Economy IPOs during the "Internet Bubble" of 1999 and 2000. Underpricing extends across all countries studied, with IPO activity being partially influenced by changes in tax regimes or in the regulatory framework. There is also a strong link between IPO performance and the national exchanges' ability to attract New Economy IPOs. This fundamentally explains why stock exchanges have attempted to establish "New Market" segments during the 1990s. Tests for performance differences between countries confirm the homogeneity of the European IPO market. In order to shed more light on the results, we study the relationship between management behaviour towards earnings management and the subsequent market response for the German IPO market. When applying two forms of earnings management, issuers that overperform in the long-run tend to manage earnings less aggressively. Over shorter measurement horizons, however, the performance is sensitive to the starting date of the measurement period. The market takes a considerable amount of time to respond to the fundamental message conveyed by management behaviour towards earnings management. Within the first four months, IPO returns are essentially driven by factors other than fundamentals. Apart from casting doubt on the efficiency of the IPO aftermarket, this can explain the observed negative relationship between short- and long-run IPO returns and the rationale behind investing in IPOs.

In this thesis we develop random-field models for the implied volatility of equity options and the term structure of interest rates. Following a brief introduction to the topics of this thesis in chapter 1, chapter 2 models the Black-Scholes implied volatility of plain-vanilla European stock options as a random field with three parameters: current time, the maturity date and the exercise price of the corresponding option. In this model all plain-vanilla European options are needed to complete the market. Illiquid and exotic derivatives can be priced as a function of the stock price and the implied volatility surface. In chapter 3 we develop a random-field model for forward interest rates with stochastic volatility. It is assumed that the forward rate volatility function can be decomposed into a deterministic function of the time to maturity and a maturity- independent stochastic process driven by a standard Brownian motion. The separability of the forward-rate volatility function allows closed-form solutions to be obtained for the prices of a number of interest rate derivatives: bond options, interest rate caplets, and interest rate spread options. Forward LIBOR and swap rates are modelled in a similar way, and closed-form solutions are derived for the prices of LIBOR caplets and swaptions. In chapter 4 we estimate three random-field models of the term structure of interest rates: one model with deterministic forward-rate volatility, and two with stochastic forward-rate volatility. The models axe estimated using seven years of daily UK and US forward rate data, spanning times to maturity between zero and 120 months. The parameters of each model are obtained by maximizing the likelihood function. We develop an importance sampling technique that substantially reduces the variance of the Monte Carlo estimator of the likelihood function in the case of stochastic volatility.

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