This Ph.D. thesis contains 4 essays in mathematical finance with a focus on pricing Asian option (Chapter 4), pricing futures and futures option (Chapter 5 and Chapter 6) and time dependent volatility in futures option (Chapter 7). In Chapter 4, the applicability of the Albrecher et al.(2005)'s comonotonicity approach was investigated in the context of various benchmark models for equities and com- modities. Instead of classical Levy models as in Albrecher et al.(2005), the focus is the Heston stochastic volatility model, the constant elasticity of variance (CEV) model and the Schwartz (1997) two-factor model. It is shown that the method delivers rather tight upper bounds for the prices of Asian Options in these models and as a by-product delivers super-hedging strategies which can be easily implemented. In Chapter 5, two types of three-factor models were studied to give the value of com- modities futures contracts, which allow volatility to be stochastic. Both these two models have closed-form solutions for futures contracts price. However, it is shown that Model 2 is better than Model 1 theoretically and also performs very well empiri- cally. Moreover, Model 2 can easily be implemented in practice. In comparison to the Schwartz (1997) two-factor model, it is shown that Model 2 has its unique advantages; hence, it is also a good choice to price the value of commodity futures contracts. Fur- thermore, if these two models are used at the same time, a more accurate price for commodity futures contracts can be obtained in most situations. In Chapter 6, the applicability of the asymptotic approach developed in Fouque et al.(2000b) was investigated for pricing commodity futures options in a Schwartz (1997) multi-factor model, featuring both stochastic convenience yield and stochastic volatility. It is shown that the zero-order term in the expansion coincides with the Schwartz (1997) two-factor term, with averaged volatility, and an explicit expression for the first-order correction term is provided. With empirical data from the natural gas futures market, it is also demonstrated that a significantly better calibration can be achieved by using the correction term as compared to the standard Schwartz (1997) two-factor expression, at virtually no extra effort. In Chapter 7, a new pricing formula is derived for futures options in the Schwartz (1997) two-factor model with time dependent spot volatility. The pricing formula can also be used to find the result of the time dependent spot volatility with futures options prices in the market. Furthermore, the limitations of the method that is used to find the time dependent spot volatility will be explained, and it is also shown how to make sure of its accuracy.

The first chapter of this thesis develops a model where a number of new hedge funds with unknown and varying ability compete to enhance their reputations by registering high performance relative to their peers. The funds’ choice variable is their return distribution, which financial engineering gives them complete control over subject to a constraint on their means that proxies for ability. This approach has the advantage of not requiring knowledge of fund moneymaking strategies. In all equilibria, funds play tail risk in expectation, and increasing the number of competitors causes tail risk and fund failure rates to rise. This is because a higher number of competitors makes it more difficult to stand out with high relative performance. In the second chapter, a variant of the model where the fund with the greatest Bayesian probability of being a high ability type wins the reputational boost is analysed as a robustness check. Funds still play tail risk, but the results from chapter 1 are weakened by the existence a class of equilibria where tail risk does not increase with the number of funds. Some equilibria of this new model correspond to the setting of Foster and Young (2010), with low ability funds mimicking high ability funds. This is because the more rational version is less like a Blotto Game and closer to a pure signalling model. In the last chapter, an incentive bonus scheme (2 and 20) commonly used in the hedge fund industry is added to the model. When funds play probability mass above the bonus threshold, such a scheme raises failure risk compared to the basic model from part 1 under some mild conditions. When financial engineering that enables return manipulation is available and managers are constrained by innate ability, such a bonus scheme gives funds incentives to play probability mass at high return levels at the cost of tail risk. With the bonus scheme, funds play less probability mass at higher variance above the bonus threshold. The model also returns a restriction on the minimum amount of tail risk.

The first essay (Chapter 2) shows that changes in gambling attitudes affect asset prices and corporate decisions. Using the Internet search volume for lottery-related keywords to capture gambling sentiment shifts, we show that when the overall gambling sentiment is high, investor demand for lottery-like stocks increases, stocks with lottery-like characteristics earn positive abnormal returns in the short-run, managers are more likely to announce stock splits to cater to the increased demand for low-priced lottery stocks, and IPOs perceived as lotteries earn higher first-day returns. Further, the sentiment-return relation is stronger among low institutional-ownership firms and in regions where gambling is more acceptable. The second essay (Chapter 3) examines the relation between social attributes and stock returns. As investors regularly update their beliefs on firm-level CSR records, they are likely to rebalance their portfolios to include firms with good social attributes. Using a novel measure to identify perceived social attributes, we demonstrate that stocks with good perceived social attributes have better future returns. A trading strategy that attempts to exploit demand-based return predictability generates an annualized risk adjusted performance of 14% and spans 15-36% of the market. Further, institutional trading results show that institutions have consistently higher demand for firms with good perceived social attributes. Our findings suggest that perceived social attributes predict stock returns. The third essay (Chapter 4) investigates how social attributes affect mutual fund flows. Using social sensitivity estimates to capture fund-level social attributes perceived by the market, we show that mutual funds with good social attributes attract 0.13% higher monthly flows than their counterparts. In addition, these funds experience greater appreciation in flows following good performance and lower decline in flows following bad performance. When investors increase demand for corporate social responsibility, funds perceived to have poor social attributes experience 0.5% reduction in monthly fund flows. Overall, our findings are consistent with the view that mutual fund investors value social attributes when making investment decisions.

This PhD dissertation research primarily aims to empirically investigate three major, yet distinct and stand alone, financial topics using data from Turkey. These are (i) analysis of effects of financial statements on stock returns and their conditional volatility using an event study methodology; (ii) analysis of relationship between credit rating and firm-specific characteristics in a cross-section framework; and (iii) analysis of credit ratings and stock market performance using both firm-specific characteristics and selected macroeconomic variables in a panel data framework. My contribution remains as a pioneering effort to analyse these issues at least in the context of Turkey. The first empirical work, based on event study methodology employing a modified asymmetric time-varying volatility model, concludes that there are significant return and volatility effects stemming from announcement of audited semi-annual financial statements. This conclusion is also valid for the pre-announcements and postannouncement dates. It should be noted that event study methodology is a test of the informational efficiency subject to the joint hypothesis problem. My results can be considered as evidence against the informational efficiency of the Turkish stock market. The second area of research is on the relationships between corporate credit ratings and firm-specific characteristics. This investigation is based on a cross-sectional regression analysis. It concluded that size, sector, systemic risk and volatility are important factors on credit ratings and stock returns. The third empirical work employs panel data methodology to analyse the relationship between corporate credit rating and stock market performance indicators. It is found that both firm-specific characteristics and macroeconomic variables have significant effects on stock returns.

This thesis consists of three chapters on the dynamics of asset returns, with a focus on global stocks and bonds. The first chapter investigates the contagion effect between the European stock and bond markets, and between the Greek bond market and other European bond markets. The perspectives of nonlinear contagion effects and the predictability of contagion are also investigated in the first chapter. The main findings are as follows. Firstly, the European sovereign debt crisis generally leads to contagion effects between domestic stock and bond markets, and this is more likely in relatively smaller countries. The financial crisis had generally led to a higher level of flight-to-quality, whilst this has also been found over the tranquil period, especially in the relatively larger countries. Secondly, the contagion effect between the Greek and other European bond markets started appearing at least four months earlier than the beginning of the European debt crisis. Thirdly, strongly significant copula estimation results reinforce the findings of the existence of nonlinear contagion effect in the Eurozone area. In addition, the information asymmetry carried by the counterpart of the GJR model significantly increases the ability of the Student-t copula to detect changes of dependence structure. Finally, conditional volatility as an explanatory variable is found to be statistically significant in explaining and predicting the contagion across at least five countries, and the level of exchange rate shows its predictive power in contagion for at least four countries. The interest rate (the level of risk free rate for the Eurozone area) is found to have the weakest predictive power amongst all the explanatory variables considered. The second chapter examines the bi-directional relationships between stock returns and trading volume, and between trading volume and volatility. By using the nonlinear Granger causality test, we find the existence of both bi-directional relations between stock returns and trading volume, and between trading volume and volatility. Further to this, from limiting the sample period to the widely known tranquil period (1994 to 2006), an interesting result is found. In comparison to the full sample test, statistically significant nonlinear results are also observed from the tranquil period. However, the nonlinear feedback from stock returns to trading volume, and the nonlinear feedback from volatility to trading volume are shown to be much stronger during the tranquil sample period than the other way round. The third chapter evaluates the effects of fundamental factors on international stock returns. Dividend, earnings and interest rate are considered as fundamental factors. The results from the international stock markets are mixed: some markets see dividends playing a more significant role in explaining the variation of stock returns, and some markets see earnings playing a more significant role. However, neither dividend nor earnings can predict the returns changes in a few markets. In order to investigate this problem, we take one step further through estimating the effects of changes of interest rates upon dividend and earnings discount models. However, our analysis only finds a slight influence there. This suggests that other unexamined factors are more important, consequently, further research is required for clarification.

This thesis presents a theoretical framework for understanding the long-term behaviour of equity markets. The framework is informed by post-Keynesian theory. It highlights the importance of effective demand for equity valuation - alongside other post-Keynesian features such as a realistic institutional setup, the (in)efficiency of financial markets in pricing assets and the importance of income and wealth distribution for macroeconomic theory. In contrast to mainstream approaches dominated and constrained only by the logic of rational agents, a Stock-Flow Consistent (SFC) methodology is followed here. The strict accounting rules of SFC models guarantee that all assets, flows and price revaluations that happen in an economic system are booked accordingly, with no accounting 'black holes' in the logical structure. The SFC approach also permits an outcome in which the market value of assets differs from their book value, a crucial distinction that should be at the core of any theory for equity returns. This thesis makes a contribution to the post-Keynesian literature on the Cambridge corporate growth models. It is shown that this literature can be used as a starting point for developing a theory of equity markets with a more realistic institutional setup. The main features of the post-Keynesian theory for equity markets developed here can be summarised as follows. First, aggregate demand determines the return on shares and their valuation in the market. Second, Tobin's q is inversely related to the growth rate of the economy in the long-run and inversely related to the marginal propensities to consume. Third, Tobin's q can be different from 1 even in the long-run. And fourth, wealth holders' consumption decisions are a major driver of the equity yield in the long-run, a feature very similar in spirit to the Levy-Kalecki profit equation, but now applied to financial markets. I conclude that post-Keynesian theory can offer an alternative to mainstream finance and fill a gap in current financial macroeconomic theory.

This thesis aims to explore stock liquidity, a crucial attribute of financial assets, in US market. In particular, this research attempts to address a number of issues in the theoretical study of liquidity, some of which even still matters for debate. The empirical results in Chapter 3 suggest that the significance of liquidity on asset returns is time specific, in other words, the heterogeneity between liquidity components exhibits a Business Cycle effect. In particular, the liquidity risk premium is strengthened during downturns of the market conditions, as the association between the asset liquidity and return in the cross-sectional dimension is relatively stronger in the period of lower market liquidity. Besides, the analysis is carried out that focuses on the interrelationship between the market-wide liquidity components and the market dynamics, and some interesting Granger causality relationship is detected. Specifically, price impact components are Granger caused by transaction costs and trading activity, but do not Granger cause trading activity. Moreover, the Granger causality detected in this section also explains that market past performance is caused by liquidity, especially the dimensions of trading activity and price impact, and subsequently, the market-wide trading activity affects the market portfolio most recent and further performance. These findings for liquidity measures in this comparative analysis establish a significant step towards the understanding of liquidity measures in a more systematic and consistent setting, and can be a good starting point for constructing more robust liquidity measures. Based on a negative relationship between volatility of liquidity and asset returns, Chapter 4 extends this finding and provides a comparative analysis of the volatility of liquidity risk through an asset pricing framework considering several dimensions of liquidity, such as transaction cost, trading activity and price impact. The empirical findings, consistent with the literature, provide evidence of heterogeneity across various liquidity components and volatility specifications. In addition, by extracting the commonality of volatility of liquidity across individual assets via principal component analysis, the systematic components of volatility of liquidity are examined accordingly. Finally, a mimicking portfolio is constructed and used to track the systematic risk of volatility of liquidity, providing evidences that the latter is priced in asset returns. Chapter 5 studies the impact of market-wide liquidity volatility on momentum profit. It is examined by investigating whether the volatility of market liquidity dominates the market liquidity level in terms of affecting and predicting the momentum profit. Besides, it is determined that the impact is state-dependent; in particular, the impact of the fluctuation of the market liquidity on the momentum payoff is stronger when the market volatility or the illiquidity is higher. Finally, by a closer inspection of the momentum crash event in 2009, it is observed that the volatility of market liquidity increases sharply a couple of months before the crash, while stays stable during and after the crash. This thesis provides implications for investment perspective in terms of the trading strategies based on liquidity as well as momentum. For instance, the performance of the liquidity measurement is time-varying associated with market conditions. Moreover, the fluctuation of market liquidity, i.e., the volatility of liquidity, should also be considered for pricing issues. The empirical results suggest that the asset, of which the liquidity fluctuates heavily, usually has lower returns; this indication applies to six popular liquidity measures according to the empirical results. More importantly, investors could make profits by reversing the momentum trading strategy in momentum crash periods.

The dissertation, which consists of three chapters, is devoted to exploring theoretical asset pricing in over-the-counter markets. In Chapter 1, I study an economy where investors can trade a long-lived asset in both exchange and OTC market. Exchange means high immediacy and high cost while OTC market corresponds to low immediacy and low cost. Investors with urgent trading needs enter the exchange while investors with medium valuations enter the OTC market. As search friction decreases, more investors enter the OTC market, the bid-ask spread narrows and the trading volume in the OTC market increases. This sheds some light on the historical pattern why most trading in corporate and municipal bonds on the NYSE migrated to OTC markets after WWII with the development of communication technology. In Chapter 2 (co-authored with Hongjun Yan and Hin Wei), we analyse a search model where an intermediary sector emerges endogenously and trades are conducted through intermediation chains. We show that the chain length and the price dispersion among inter-dealer trades are decreasing in search cost, search speed and market size, but increasing in investors’ trading needs. Using data from the U.S. corporate bond market, we find evidence broadly consistent with these predictions. Moreover, as the search speed goes to infinity, our searchmarket equilibrium does not always converge to the centralized-market equilibrium. In particular, the trading volume explodes when the search cost approaches zero. In Chapter 3 (co-authored with Hongjun Yan), we analyse a search model where two assets with different level of liquidity and safety are traded. We find that the marginal investor’s preference for safety and liquidity is not enough to determine the premium in equilibrium, but the whole distribution of investors’ valuations play an important role. We specify the condition under which an increase in the supply of the liquid asset may increase or decrease the liquidity premium. The paper also endogenizes the investment in the search technology and conducts welfare analysis. We find that investors may over- or underinvest in the search technology relative to a central planner.

The OTC derivatives market has captured the attention of regulators after the Global Financial Crisis due to the risk it poses to financial stability. Under the post-crisis regulatory reform the concentration of business, and risks, among a few major players is changed by the concentration of a large portion of transactions in the new market infrastructures, the Central Counterparties (CCPs). This work, for the first time, analyses the regulatory response of the United Kingdom, the largest centre of OTC derivatives transactions, and highlights its shortcomings or 'fractures'. The work uses a normative risk-based approach to regulation as a methodological lens to analyse the UK regime of CCPs in the OTC derivatives market (OTCDM). It is specifically focused on prudential supervision and conduct of business rules governing OTC derivatives transactions and the move towards enhancing the use of central clearing. The resulting analysis, from a normative risk based approach, suggests that the UK regime for CCPs does not fulfil what would be expected if a coherent risk based approach were taken. The main contribution of this work is to highlight the risk based 'fractures' affecting the regulation and supervision of CCPs in the OTCDM. The absence of a coherent conduct of business regime of CCPs, the insufficient legal framework underpinning CCPs' operations, the lack of a Special Resolution Regime for CCPs are some notable absences. However the failure to rule 'Innovation Risk' from a risk based approach raises material concerns. It is therefore argued that these fractures hinder the achievement of the regulatory objectives. The regulator's objective is to enhance the stability of the OTCDM by ensuring the safety and soundness of Central Counterparties CCPs.

As a nation, Canada has claimed global success in financial services in many ways. However, the scale of the Canadian hedge fund industry is incomparable to that of London and New York. Although it only holds 1.5% of global hedge fund assets, the Canadian hedge fund industry has the ingredients to become a leader among its peers. During the past ten years, several external factors (including changes in technology, the 2008 economic crash, and trends in outsourcing) have had an effect on financial services worldwide, but there are also internal factors specific to Canada that have directly contributed to the industry’s lack of scale. The thesis uses cluster concepts to gain an in-depth understanding of these patterns and identify the causes for the Canadian hedge fund industry’s lack of scale. However, cluster concepts are only useful to a limited extent in explaining the emergence, sustenance, and decline of financial services clusters. Historically, cluster concepts as explored by Marshall (1890), Porter (1990), and Piore and Sabel (1984) have been used to explain the successes and failures of manufacturing industry clusters, but these theories have been infrequently used to explain financial services industries. The dispersion of clusters due to globalization, advancements in technology, and deglomeration has made it even more challenging to identify, measure, and evaluate cluster behaviour in general, but especially in the financial services industry. Therefore, in addition to traditional cluster theories, this thesis seeks to evaluate the dynamics of the Canadian hedge fund cluster using newer theories such as New Economic Geography and the concepts of dispersion and deglomeration in order to explain Canadian hedge funds’ lack of scale. The thesis explores the main ingredients for cluster formation and growth, as well as the opposing arguments of cluster dispersal. A mixed-methods approach was used, employing semi-structured interviews and secondary analysis. Endogenous causes specific to Canada were isolated and investigated through data analysis. Throughout this study, the task of cluster facilitation was explored in order to identify the key role that each individual participant plays within the Canadian hedge fund industry. The present research is the first of its kind, and could open up possibilities for further study. The core of future research could be focused on the cluster measurement and identification of cluster borders. Another research stream could attempt to deepen understanding of the feasibility of each recommendation listed in this research. This could involve more detailed, exploratory quantitative and qualitative work that could quantify the cost and benefits of promoting hedge funds in Canada.