In this thesis, we investigate the relationship between the US stock returns and downside risk in a cross-sectional context. When the classic market model with a moving window approach is adopted, downside risk estimated coefficients exhibit a positive impact on stock returns. However, when two other non-linear time-varying models; the cuiic piecewise polynomial function (CPPF) and the Fourier Flexible Form (FFF) models are adopted, downside risk estimated coefficients show a negative impact on stock returns, Cross-sectinally, the reisk estimated coefficients of the town non-linear models produce a much better fit than the classic market model. The predictive power for future stock returns of downside risk estimated coefficients are found to be weak. Two more risk factors: commodityh market risk and Aruoba-Diebold-Scotti (ADS) business condition index risk (both downside and upside versions thereof), are shown to have a significant effect on stock returns.

This thesis studies the momentum effect in the UK stock market. The momentum effect is found to be a persistent yet not fully stable phenomenon in the UK stock market and its dynamics is at least partially conditional on the stability of the stock market. When the stock market is stable, momentum trading strategies tend to have rather reliable and good performances whereas when the stock market is in turmoil, momentum trading strategies tend to suffer losses in the near future. We construct a threshold regression model to analyse this relationship between the momentum effect and the stock market stability. We propose that there are two regimes in the short run for shares that have had extreme past performances, the momentum and the reversal regime, and that the switch from one regime to the other is governed by the stock market volatility. Our estimation results confirm this significant role of the stock market volatility. Moreover, the stock market volatility has a negative impact on a momentum trading strategy’s return in both regimes in most cases. Apart from the stock market volatility, we also find that a momentum portfolio’s ranking period return has a significant inverse relationship with its holding period return in the momentum regime, i.e., the magnitude of the momentum effect during its holding period. This negative relationship suggests that the reversal can occur in the short term even in the momentum regime when the ranking period return is sufficiently large. A new type of trading strategies is designed to take advantage of the predictability of the momentum effect dynamics, in particular, the switch between the momentum and the reversal, and our results show that they outperform momentum trading strategies with higher returns and lower risks. Indeed, following the indication of the threshold regression model, these new trading strategies can exploit not only the momentum effect but also the contrarian effect. More importantly, they are able to generate economically significant profits net of transaction costs even when momentum trading strategies fail to do so. The predictability of the dynamics of the momentum effect and the superior performance of our new trading strategies create an even bigger anomaly than the momentum effect itself in the stock market.

This thesis empirically examined conditional four-moment CAPM and APT pre-specified macroeconomic variables with market liquidity in four Arab stock markets, namely Jordan, Morocco, Tunisia and Kuwait over a period extended from January 1998 to December 2009. The desire to test these models in the Arab stock market was motivated by that fact that stock returns in these markets do not follow normal distribution and there exist third and fourth moments (skewness and kurtosis). More than 50% of the realised returns from the Arab stock market are lower than the risk free return, meaning the realised return is negative. Arab countries are different in terms of their economic situation and many have carried out economic reform programmes. In addition, their stock markets have been affected by multiple political and economic shocks. Arab stock markets are characterised by a low number of listed companies, low trading volume, low value of market capitalisation, and hence low market liquidity. Examination of the conditional four-moment CAPM was performed using panel data regression, whereas APT pre-specified macroeconomic variables with market liquidity by using six macroeconomic variables: industrial production, inflation, money supply, interest rate, exchange rate and oil price, panel data regression and Principal Components Analysis (PCA). The results of unconditional two-, three- and four-moment CAPM showed that there was not a significant positive relationship between beta and co-kurtosis, and return and that there was an insignificant relationship between co-skewness and return which was opposite to sign of market skewness in all stock markets included in the sample. However, the results of testing conditional two-, three- and four-moment CAPM showed a significant positive (negative) relationship between beta and return in an up (down) market in all the stock markets included in the sample. The results of conditional three- and four-moment CAPM showed a significant negative (positive) relationship between co-skewness and return when the market was up (down) in Jordan and Tunisia. Based on the results of conditional four-moment CAPM, a positive (negative) relationship between co-kurtosis and return in up (down) markets was found in Tunisia only when using a value weighted index (VWI). The results of panel data regression and PCA revealed that the most important macroeconomic variables that remain significant in explaining stock returns were oil price for Jordan and exchange rate and oil price for Kuwait. With respect to market liquidity, the results showed a significant negative relationship between market liquidity and stock returns in both Jordan and Kuwait. Generally, empirical results showed that the most important variable to explain the cross-section of stock returns is conditional co-variance (conditional beta), whereas the importance of others variables (co-skewness, co-kurtosis, macroeconomic variables and market liquidity) were different from market to other.

The present thesis examines how stock returns in the UK market are related to two specific firms’ characteristics that have attracted the interest of policy makers and the academic literature due to their importance during the recent global financial crisis: i) the financial constraints that firms face in their attempt to invest and grow at their desirable pace and ii) the level and structure of the compensation that corporations pay to their executives. Chapter 2 examines how the financial constraints that firms may face in their attempt to invest and grow at their desirable pace are related to the stock returns earned by their shareholders during the period 1988-2010. To this end, Chapter 2 uses a survivorship bias-free sample of firms listed on LSE and a series of proxies to measure the degree of financial constraints that these firms face. Classifying firms as financially constrained or unconstrained according to each of these proxies, we examine whether the most financially constrained firms yield a higher level of returns to investors relative to the least constrained ones. The main finding of Chapter 2 is that investors in highly constrained firms were not rewarded for being exposed to this aspect of risk, regardless of the utilized proxy. To the contrary, the portfolio containing the most constrained firms underperformed the portfolio containing the least constrained firms in most of the cases we have examined. Chapter 3 examines the effect of firms’ financial constraints on the response of their stock returns to UK monetary policy shocks during the period 1999-2011. These shocks are extracted on the meeting days of Bank of England’s Monetary Policy Committee. Using a survivorship bias-free dataset of firms listed on LSE and a number of proxies to measure firms’ financial constraints, we find no significant evidence to support the argument that the return response of the most constrained firms is of greater magnitude relative to the corresponding response of the least constrained firms. The opposite is actually true for most of the measures we use. Moreover, we find that the inverse relationship between monetary policy shocks and stock returns became positive during the 2007-2009 crisis period. Finally, the relationship between stock returns and monetary policy shocks in the UK market exhibits state dependence, especially across tight versus loose credit market conditions. Chapter 4 examines the relationship between the level and the structure of the compensation that firms listed on LSE pay to their executives and the subsequent returns that their shareholders earn during the period 1998-2010. Total CEO compensation is decomposed into its cash- and incentive-based components. The results in Chapter 4 indicate a strong negative relationship between CEO incentive pay and future shareholder returns. Moreover, the outperformance of firms with low pay is less pronounced but still apparent when longer investment horizons are considered. Finally, we provide evidence that, in contrast to incentive pay, cash pay is not found to be related to future shareholder returns in a statistically significant way. Chapter 5 concludes this thesis, providing an overview of its contributions and empirical results, outlining their implications and discussing issues for future research.

The present thesis examines whether important corporate governance characteristics of British boards are related to corporate cash holdings/liquidity, firm performance and stock price crashes. By conducting this research, we examine the informational content for investors and policymakers of two important corporate governance characteristics: i) the number of directorships held by executive directors or directors’ “busyness”; ii) the level of gap in compensation companies pay to their CEO and other executive directors, or CEO “pay slice”. Chapter 2 examines the effect of board busyness on corporate cash holdings. We offer new insights by evaluating two conflicting views regarding the quality of service that busy directors provide to corporate boards and their impact on decision making. One view is that directors who simultaneously serve on multiple boards improve board decision making ability as they have better experience and business connections (reputational effect).The opposite view is that directors with multiple seats are “too busy to mind the business”, which creates serious agency problems and leads into suboptimal corporate decisions (busyness effect). We analyse a large sample of UK listed companies over the 1997 to 2009 period and document evidence supporting a non-linear relationship between our proxy for board busyness and corporate cash holdings. In line with the reputational effect, we find that companies with board members that hold seats in other companies maintain a higher level of cash, net cash and financial slack. This effect is present, however, only at low levels of board busyness. In line with the busyness effect, our findings suggest that as board busyness increases beyond a certain threshold, it negatively affects cash holdings, net cash and financial slack. Chapter 3 examines a relationship between the CEO Pay Slice (CPS) – the fraction of the top five executive directors’ total compensation that is captured by CEO - and firm value in the UK. CPS reflects the relative importance of CEO as well as the extent to which the CEO is able to extract rents . CPS may also alter effectiveness of board performance by influencing cooperation and cohesiveness among its members. Using a large sample of UK-listed companies over the 1997 to 2010 period, we document evidence supporting a negative relationship between CPS and firm value as measured by Tobin’s Q. Our results are consistent with the hypothesis that high CPS is associated with agency problems, and is likely to impact negatively on the executive team’s spirit and motivation. Our results have major implications for the on-going debate on how to reform executive remuneration, and highlight the importance of considering remuneration issues at the board level, supporting the principles of UK Corporate Governance Code (2010). Chapter 4 examines the relationship between corporate governance characteristics and risk of stock price crash in UK firms. We use CEO Pay Slice (CPS) – the fraction of the maximum top-five executives’ total compensation that goes to the CEO, and board ‘busyness’ – the proportion of board level directors who have three or more directorships , to evaluate the effect of these two important aspects of corporate governance on stock price crash risk. The CPS reflects relative importance of the CEO as well as the extent to which the CEO is able to extract rents and expropriate shareholders wealth (expropriation effect). Board busyness may create a serious agency problem because directors are “too busy to mind the business”, allowing for executives’ short-termism and bad news hoarding (busyness effect). Stock price crash risk captures asymmetry in risk, especially downside risk, and is important for investment decisions and risk management (Kim et al., 2014). Using a large sample of UK listed companies over the 1997 to 2010 period, we document evidence supporting a positive relationship between CPS, board busyness and stock price crash risk. In line with the expropriation and busyness effects, we find that companies with high CPS and high levels of board busyness are exposed to higher level of stock price crash risk. The fact that CPS positively impacts on stock price crash risk has a strong implication for the on-going debate on how to reform executive remuneration so that it provides the right incentives to directors. There is also a direct implication for the public debate on limitation of the number of directorships held by executives from our findings, as we argue that board effectiveness depends on the overall level of board business. Chapter 5 concludes this thesis, providing an overview of its contribution and empirical results and outlining their implications.

Two major trends have emerged in the hedge fund industry over the last ten years. On the one hand, this industry became one of the most creative and innovative fields in international finance. Due to its fast growth and its constant development, regulators found it difficult to mitigate the potential risks induced to both investors and the financial system. On the other hand, the crisis emerging in 2007-2009 concurrently caused many recalls within the hedge fund industry. This shut down many funds. Similarly, hedge fund managers received arbitration and litigation charges in recent years, all at investors’ expense. These cases were extremely rare during the previous years. These trends raised two major questions: Should tighter regulation or lighter regulation be applied to the hedge fund industry? Which one favours the investors better and assures their increased protection? This thesis pursues the answer to these questions, by examining the regulation of hedge funds focusing mainly on investor protection firstly in the US, including the impact of the Dodd-Frank Act and secondly in the EU and the selected single European jurisdictions (the UK, Italy, France, Ireland, Luxembourg, Malta and Switzerland), and the impact of the AIFM Directive on the local jurisdictions, with the final purpose to establish the framework for a global hedge funds regulation, especially in terms of investors’ interests protection. In addition, this thesis provides practical recommendations for their regulatory future. The present research confirms that the lack of global regulation in this industry before the crisis simply indicated the preferences of the two prevailing financial world leaders: the US and the UK. However, hedge funds regulation should not be performed in absurdum. Risks mitigation alone is not enough reason for eliminating the advantages of hedge funds. Real progress in providing protection to investors is necessary for the coordination of the hedge fund regulation in the European countries with those in the US, while simplifying the financial regulatory system, as investor protection and prudential regulation are the main financial stability instruments in the hands of law-makers.

This thesis compromises one literature review chapter and three essays which focus on the theme of valuation, value premium anomaly, R&D premium anomaly, momentum anomaly and emerging markets. The first essay is entitled “Does Low Book-to-market Predict Low Returns? The Other Side of Growth: Research and Development Investment”. In this essay, I develop a theoretical framework of the risk and return of R&D, and examine the relation between R&D and BM. This paper documents that the intersections of R&D and BM produce enhanced trading strategies, and that the four-factor model, with a R&D factor, outperforms the three-factor model. The second essay, entitled “Firm Characteristics and Momentum”, studies the momentum anomaly. In this essay, I examine the relations of firm characteristics and momentum in US stocks. Momentum effect seems to be less significant in recent years. Most importantly, this paper presents that firm size and growth option may plays an important role in momentum trading strategy. The returns of large and medium winners/losers tend to sustain, while small winners/losers tend to reverse quickly. Also, it also shows that R&D investment enhance the reversal effect of small firms, especially in high-tech industries. The third essay, entitle “Firm Attributes and Momentum Strategies in China”, focus on the emerging market China. This study investigates the momentum and reversal phenomenon in China, based on most up-to-date data. It shows that Chinese stock market experiences barely momentum effect, but the reversal effect is increasingly significant in the long horizon. Additionally, two risk proxies, size and R&D expense, are employed to explain momentum and reversal effect. It shows that the returns of large stocks are more likely to be persistent, while that of small firms are more likely reverse. Moreover, R&D investment reduces reversal effect, especially for small firms.

The main objective of this thesis is to investigate the short and long–term overreaction phenomenon in the Egyptian stock market. In addition, the thesis investigates links between stock market regulatory policies (price limits and circuit breakers) and the profitability of contrarian strategies. Finally, the study examines the effect of regime switch – from strict price limits to circuit breakers – on the volatility spillover, delayed price discovery and trading interference hypotheses. Using data from the Egyptian stock exchange, I find that a panel data approach adds a new dimension to the existing models, offers interesting additional insights and reveals the importance of the role of unobservable firm-specific factors in addition to observable factors in the analysis of the overreaction phenomenon. Moreover, portfolios based on unobserved factors i.e. management quality, corporate governance and political connections of board members, significantly outperform traditional portfolios based on size. Results also show evidence of genuine long-term overreaction phenomenon in the Egyptian stock market as the contrarian profits of the arbitrage portfolio cannot be attributed to the small firm effect, formation period length, and stability of time varying factor or seasonality effect. Finally, switching from a strict price limit to a circuit breakers regime increases stock price volatility and disrupts the price discovery mechanism in the Egyptian stock market.

The first paper of this thesis uses a unique data set to assess the determinants of inflows and outflows in the fund industry. The higher frequency of the data allows to examine whether recent past performance affects the flow-performance relation. I find that the latter is concave for the worst-performing funds and convex for the best-performing funds. This is in stark contrast to previous studies in the literature that document a strict convex relationship. The disaggregation by inflows and outflows further indicates that the concavity is mainly due to outflows, which react much quicker to bad performance than previously assumed, whereas the convexity is driven by inflows. Finally, I also compare how the type of client affects the flow- performance relationship. I show that investors deemed less sophisticated care more about short-term performance than other investors, and more about raw returns than risk-adjusted returns. The second paper investigates how funds shift risk as a function of past performance. In contrast to the literature, I manage to disentangle the implicit incentive generated by the flow-performance relationship from the direct incentive generated by the portfolio manager remuneration contract. Identification is only possible because I focus on funds that pay bonus every six months instead of every year. I show not only that contracts have an asymmetric effect on risk, but also that the tournament within the fund family is the main driver of risk shifting. This is consistent with families actively engaging in the tournament by transferring not only performance, as suggested by the literature, but also risk from their worst- to their best-performing funds. The last paper is joint with Pedro A. Saffi and uses a data set of Brazilian hedge funds holdings to examine the impact of long and short positions on performance. In particular, we test if changes in long/short positions and their risk can forecast future performance. While we find that funds with large increases in the risk of long-only positions risk relative to the previous 24 months underperform by about 3% per year on average, those that increase the risk of short-only positions overperform their peers by about 1% a year on average, net of fees. Neither monthly changes of long nor short positions can forecast next month’s abnormal returns.

Multiple equilibria models are one of the main categories of theoretical models for stock market crashes. To the best of my knowledge, existing multiple equilibria models have been developed within a discrete time framework and only explain the intuition behind a single crash on the market. The main objective of this thesis is to model multiple equilibria and demonstrate how market prices move from one regime into another in a continuous time framework. As a consequence of this, a multiple jump structure is obtained with both possible booms and crashes, which are defined as points of discontinuity of the stock price process. I consider five different models for stock market booms and crashes, and look at their pros and cons. For all of these models, I prove that the stock price is a cadlag semimartingale process and find conditional distributions for the time of the next jump, the type of the next jump and the size of the next jump, given the public information available to market participants. Finally, I discuss the problem of model parameter estimation and conduct a number of numerical studies.