For most of the 20th century commodity prices fell in real terms. Prices of metals, energy and food became so low that they were almost irrelevant to developed world consumers. Since 2003 prices have risen sharply, and have become so high they have been blamed for recessions, civil unrest and even revolutions. Although increased speculation in commodity markets has probably played a role, the fundamental factors of supply and demand continue to form the most important determinant of commodity prices. Price rises have been caused by ‘scarcity’ caused by rapid demand growth from newly affluent consumers in the developing world, meeting a supply that has struggled to respond. Understanding current and future scarcity in commodities therefore helps us predict and warn of further price spikes. This thesis studies all three major commodity groups, examining existing ways to measure scarcity and proposing new ones. Firstly we study the base (industrial) metals. We examine the ‘theory of storage’, which explains price and price volatility in terms of the quantity stored in inventory, a key measure of scarcity. Secondly we study energy markets. Electricity cannot be stored, so the ‘theory of storage’ cannot be applied. We note an alternative measure of scarcity which allows us to apply a modified theory of storage to electricity. We also examine its applicability to another key energy commodity, crude oil. Finally we examine scarcity in the agricultural products. Here we have inventory data, providing short-term scarcity information, but unlike for energy and metals, we have no concept of reserves, being that resource known but remaining in the ground, which provides longer-term scarcity information. Instead, we propose and examine several other ways to measure scarcity.

This thesis presents three independent essays that reassess common simplifying assumptions of behaviour of the main micro economic agents: individuals, consumers and firms. The first chapter considers whether individuals' reciprocal preferences can be approximated by a preference for equality. Analysing subjects' behaviour in a bargaining game experiment provides evidence that people are willing to increase inequality between players by (i) sacrificing payoffs even when opponents are not punished and (ii) eliminating opponents' payoffs at no cost, even if opponents have smaller shares of the surplus. The second chapter reconsiders whether firms can profitably conceal their prices if some consumers are unable to form correct expectations of market prices. A theoretical model shows that the ability to conceal prices but still attract naIve consumers dampens competition and allows prices to be set above marginal cost. It suggests that the European Commission was correct to pass regulations that require airlines to set prices inclusive of taxes, fees and charges, because alternative policies of educating a proportion of naIve consumers to become sophisticated or assisting consumers to search the market more effectively could increase prices in some situations. The final chapter considers the implication of firms that maintain collusion through price matching punishments, as opposed to Nash reversion. A theoretical model shows that firms find it difficult to set higher prices during a cost shock, contrary to the conventional wisdom. However, if firms are credibly committed to surcharges for the shock's duration they are able to set higher supracompetitive prices.

This thesis documents research and findings of three essays in the area of prediction and forecast of economic cycles. Each essay in this thesis is dedicated to address one particular aspect of the research. The thesis also contributes to the existing research by providing additional empirical evidence on the predictability of the real economic activity and recessions in the US. The first essay (Chapter 2) focuses on the long horizon inference methods, and examines the predictability of real GDP growth rate in the US using several well known predictors. A battery of specifically designed inference methods are employed in the analysis to address statistical complications introduced by overlapping long horizon dependent variable. The recursive moving block Jack-knife method is used to correct the biased estimated coefficients. The second essay (Chapter 3) puts emphasize on the out-of-sample forecast evaluation between nested and non-nested model. The forecast performances of various forecasting models are evaluated against two naive benchmark models, namely the random walk model and the autoregressive model. For the nested model, the asymptotically valid critical values for the forecast evaluation are derived from bootstrap simulations. The robustness of the test results are examined by Rossi and Inoue (2011 )'s robustness tests. The third essay (Chapter 4) utilizes the probit model to examine the predictability of recessions in the US. We evaluate the predictive power of several non-linear transformed predictors against that of the yield spread, and we also introduce a similar approach as in Rossi and !noue (2011) to examine the average and peak forecast ability of the predictors. The forecast performances of the predictors under various model specifications are carefully investigated in this chapter as well

This research project utilises both quantitative and qualitative research methods and provides empirical evidence on the financial as well as non-financial and behavioural issues governing the financial policies and capital structure choices of privately held companies (independent small and medium sized enterprises (SMEs) with less then two hundred employees). Different capital structure theories are reviewed in order to formulate testable propositions concerning the levels of debt in small private companies and different research methods are employed to test these hypotheses (these include a number of regression models utilising a panel database of 3,500 SMEs over a period of ten years (1986-1995),30 face-to-face interviews and two postal surveys with responses from more than 300 companies). The results do not provide support for the theorised effect of tax benefits and bankruptcy costs on the capital structure of small privately held companies. Rather, of greater importance are agency and asymmetric information costs that make debt finance less attractive in the small business sector. Size, age, profitability, growth and future growth opportunities, operating risk, asset structure, stock level and net debtors all seem to have an effect on the level of both the short and long term debt in small firms. Furthermore, the research project provides evidence which suggests that the capital structure of small private companies is time and industry dependent. The results also indicate that the last recession had an effect on the borrowing behaviour of small businesses, which appear to be more prudent in their financing strategies as they now rely less and less on debt finance and more on retained profits. At the same time, financial institutions appear to be more cautious in their lending policies as collateral for the security of loans has became of increasing importance. It is also shown that owner/directors' preferences, perceptions, beliefs and attitudes towards external finance (both debt and equity) have a major impact on financial policies and capital structure choices of these firms. Evidently, the debt-equity position of private companies at any time will be largely affected by different characteristics of the owner/director such as: risk taking propensity, business and personal goals, need for control, knowledge, personal net worth, age and past experience. Small business owner/directors seem to follow a pecking order in financing their firm's needs, using retained profits as much as possible and issue debt only when it is necessary. In these businesses, where there is a strong need for managerial and ownership control, external equity is only considered as a last resort. During the stages of business development, there will be phases when a firm can rely on internal financing and times when external debt or equity will be required. The results presented in this thesis suggest that different firm and marketplace characteristics will determine the need as well as the ability of the firm to raise external finance. However, once financial needs are identified, the final choice between debt and equity, or whether any external finance at all will be raised, will largely depend on the preferences and expectations of the owner/director. In short, the capital structure of a small privately held company at any time, will be a function of the characteristics of the firm, its owner/managers, and of the marketplace. The thesis discusses a number of policy implications that emanate from the findings, and considers a number of possible actions that the government and financial institutions could undertake in order to enhance the financial development and prosperity of SMEs.

This thesis analyses the interactions between in vestment and financing decisions under an equityholder-debtholder agency conflicts framework . It imposes time constraints on the life of the options to invest and on the life of the firm , to reflect the reality of concession contracts and patents. In both cases a contingent claims analysis model of a firm is developed, to value the firm and the different claims to the value of the firm. These models are used to determine the agency costs of debt in terms of reduction in firm value (dividing them into their financial and operational components). loss of debt capacity and increase in credit spreads. The concession problem analysed, models two different debt amortization schedules. a constant amortization schedule (CA) and a constant repayment debt schedule (CR). The patent problem also analyses whether it is optimal for a firm to delay filing a patent application when it does not intend to market-launch the product immediately. In both chapters the agency costs of debt measured as a reduction in firm value are not very significant. ]n the concession problem analysed, they represent 0.09% and 0. 13% of the value of the levered firm following a second-best in vestment policy with the CA and CR debt schedules. In the patent problem, the agency costs of debt measured as a percentage of the value of the levered firm following a second-best market-launch policy represent 2.49% when the firm separates the decision to patent from the decision to market-launch the product and 2.25% when both decisions occur simultaneously. However, the impact of the agency conflicts is quite significant when measured in terms of loss of debt capacity. If equityholders could credibly pre-commit to follow a firm maximizing investment (concession problem) or market-launch (patent problem) policy the debt capacity of the firm would increase by 6.74% (CA) and 10. 11 % (CR) in the concession problem and by 27.3% (the firm separates the decision to patent from the decision to market-launch the product) and 25.0% (the firm simultaneously patents and market-launches the product) in the patent problem. These results reveal that the agency conflicts affect more significantly the distribution of wealth between the different stakeholders rather than the overall value of the firm . Models that ignore such conflicts generate relatively accurate valuations for the value of the firm, but they fail to produce good valuations for the different securities.

The thesis seeks to compare and extend a number of analytical and simulation procedures to a series of progressively more complex activity-analysis problems which are common to business application and economic theory. Beginning with two industrial examples, which are used to illustrate the nature of linear production interdependencies and the relevance and limitations of a Leontief-type input-output approach to such static single time period problems, the thesis explores further analytical contributions to a more difficult "general logistics problem" incorporating decisions concerning the allocation, scheduling and investment of resources in an environment that is both interdependent and subject to stochastic variation. In one delimited logistics problem the Hitchcock-Koopmans algorithm is amalgamated with an extension of an algorithm proposed by Dantzig and Fulkerson to derive a shipping schedule that minimises the number of vehicles necessary to satisfy a known demand in4a network of origins and destinations. A multi- stage linear programming procedure with more realistically detailed properties is then proposed, but quickly abandoned because of implied computational requirements. It is therefore argued that simulation procedures offer the only operational means for studying such analytically and computationally intractable problems. This approach is fraught with its own difficulties, not the least of which is choosing among contending decision rules once the model is constructed. Such a choice is attempted following statistical guidelines in a stochastic logistics simulation experiment. The text concludes with the means for choosing among alternative resource allocation rules in a computer simulated abstract economy.

This thesis concerns the mathematical modeling of limit order books. We study zero-intelligence ("ZI ") models of limit order books where order book events are governed by Poisson processes. Extending the mean-field approximations of [1] to the time-inhomogeneous case, we study the expected relaxation of the order book and mid price movement following an out-of equilibrium initial condition. The resulting equations are suggestive of how limit order book state might be used as a trading signal in liquidation algorithms or proprietary trading. The same mean-field techniques are used to study the mean response over time of the limit order book in different states to the submission of market orders of different sizes (loosely, the market impact function implied by ZI dynamics). We extend existing models of liquidation under risk aversion (e.g. [2]) to the case where the liquidating agent transacts using market orders against a limit order book with ZI dynamics. The resulting model has rich features, since expected price movement, volatility and temporary and permanent market impact all depend stochastically on the order book state. We propose methods for approximate solution of the resulting multiple optimal stopping problem and discuss extension to the case where our agent can transact using limit orders as well as market orders. We also discuss the extent to which stochastic market impact results in a model which is acceptable in terms being free of unrealistic arbitrage opportunities. In certain markets, the limit order book is only partially observable. Using HMM techniques, we consider inference ofthe distribution of order book state from observed book evolution and implications of partial observation for price prediction and liquidation algorithms. Finally, we step outside of the ZI paradigm to consider clustering of arrivals market orders. Following e.g. [3] we use Hawkes processes to model this clustering. Under the additional assumption of zero market maker profitability, we solve for the price impact function and optimal liquidation path of a large trader.

This study investigates a factor that observation suggests is an important causal factor in economic outcomes, namely governance. Because contemporary economic theory provides little explanation of the observed link between innovation, governance and growth, a new theory of microeconomic activity is proposed; one that brings together the efficient markets hypothesis of financial economics, and the role of property rights that is central to the new institutional economics of North and Williamson. In particular, a conceptual model is set out, suggesting that the existence of governance mechanisms, which enable credible commitments to be given regarding future economic performance, is a crucial enabling factor for economic growth; because, within a market economy with imperfect information, they provide the right incentives for the cooperation necessary for socially beneficial innovation. The central body of the thesis seeks to test this model by applying it to four separate but important historical epochs, using secondary historical sources. Ancient and medieval Europe provides the first two applications. Following this, detailed consideration is given to England around the eighteenth century, and then to the United States in the late nineteenth and early twentieth centuries. The development of commitment mechanisms, first in the form of legal contracting, and then in public accounting, is described, and, when this also enables the growth of financial markets, economic growth in the form envisaged by the theory can be observed. Furthermore, the thesis argues for the scientific value of this commitment-credit theory, because of the observability, and so testability, of the concepts at its core. This suggests that, from the point of view of managers and government policymakers, this is an improvement over many other economic theories, and the neoclassical theory in particular, which builds on introspectively derived axioms, and rushes to give policy recommendations, without first testing the validity of the theory.

The literature on adverse selection has until recently concentrated on the case where the agent's outside option is type-independent, implying that all types of agent receive the same payoff should no trade occur with the principal. Unfortunately, this assumption is not innocuous. If it is relaxed, the properties of the optimal contract can change dramatically. This thesis characterizes the impact of type-dependent outside options in three different settings. First, we explore the notion that a worker's prospects in the labour market may be influenced by his employment history. Under these circumstances, employers may incentivise their employees by randomizing over the probability with which current employees are retained. We identify a set of sufficient conditions for this to be the case in a two-period employment relationship, where the employee's ability is private information and both parties are risk-neutral. Although randomization is seldom observed in the real world, our results suggest that employers may optimally introduce some ambiguity over the conditions that need to be fulfilled in order to be retained. Second, we study competition in price-quality menus within the context of an horizontally differentiated duopoly, where each firm also operates in a local, monopolistic market. It is assumed that the consumer's (unobservable) valuation for quality is determined by the nature of his preferences over horizontal (or brand) product characteristics. We find that, if competition between the two firms is sufficiently fierce: (1) the equilibrium quality schedule exhibits bunching and (2) the equilibrium contract features overprovision of quality for sufficiently low types. Thus, with respect to the monopoly setting, competition may introduce new types of distortions, namely upward distortions. Third, we analyze the conflict of interests that arises between employers and employees with respect to the adoption of innovations that change the nature of the skills relevant for production. If an employer decides to adopt a new technology, he will also replace his specialist workforce. Thus, although a current employee has access to superior information concerning the efficiency of the new technology, he also has an incentive to misreport it. We show that if (1) the employee's expected utility from alternative employment is lower when the new technology is superior and (2) the employer cannot commit to retain the employee if the new technology is adopted, no renegotiation-proof contract exists, which induces the employee to truthfully reveal his information. In the special case where the employee can ex-ante commit to make his information publicly available (commitment to transparency), access to external sources of information can result in the employer's choice of technology being less efficient than otherwise.

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