This thesis consists of three essays. In the first essay, we derive a pricing kernel for a continuous-time long-run risks (LRR) economy with the Epstein-Zin utility function, non-i.i.d. consumption growth, and incomplete information about fundamentals. In equilibrium, agents learn about latent conditional mean of consumption growth and price equity simultaneously. Since the pricing kernel is endogenous and affected by learning, uncertainty about unobserved conditional mean of consumption growth affects risk prices corresponding to shocks in both consumption and dividend growth. We demonstrate our analytical results by applying the model to a profitability-based equity valuation model proposed by Pastor and Veronesi (2003). Calibration of the model demonstrates that the LRR model with learning has potential to fit levels of price-dividend ratios of the S&P 500 Composite Index, equity premium, and the short term interest rate simultaneously. In essay two, we extend the LRR model with incomplete information proposed in essay one by incorporating inflation and applying the model to the valuation of nominal term structure of interest rate. We estimate the processes of state variables and latent variables using a Bayesian Markov-Chain Monte Carlo method. In the estimation, we rely only on the information in macro-economic data on aggregate consumption growth, inflation, and dividend growth on S&P 500 Composite Index. In this way, parameters and latent state variables are estimated outside the model. Estimation results suggest a mildly persistent LRR component. However, both real and nominal yield curves implied by the LRR model are downward-sloping. We show that the inverted yield curve is due to a negative risk premium, which is determined jointly by covariance between shocks in state variables and shocks in the nominal pricing kernel. Incorporating learning about the mean consumption growth flattens the yield curve but does not change the sign of the yield curve slope. In essay three, we study the critique of the conditional affine factor asset pricing models proposed by Lewellen and Nagel (2006). They suggest that two important economic constraints are overlooked in cross-sectional regressions. First, the estimated unconditional slope associated with a risk factor should equal the average risk premium on that factor in a conditional model. Second, the estimated slope associated with the product of a risk factor and an instrument should be equal to the covariance of the factor risk premium with the instrument. We test both constraints on conditional models with time-varying betas and our results confirm the proposition. Also, from the functional relationship between conditional and unconditional betas, we identify an unconditional constraint on unconditional betas for time-varying beta models and develop a testing procedure subject to this constraint. We show that imposing this unconditional constraint changes estimates of unconditional betas and risk prices significantly. / October 2016

Thesis advisor: Ronnie Sadka / In the first essay, we estimate liquidity-driven trading volume, denoted as inside volume, based on the joint daily reversal pattern of volume and price. With this measure, we find that firms experience a shock to idiosyncratic volatility display an increase in liquidity provision. Furthermore, the under-performance of high-idiosyncratic volatility firms is limited to those with high inside-volume. The relation between idiosyncratic volatility and liquidity provision is prominent in both over- and under-priced stocks. The results suggest that the idiosyncratic volatility puzzle is largely driven by liquidity provision. In the second essay, I document a discontinuity at zero in the conditional distribution of hedge fund quarterly returns following underperformance and outflow. I propose a dynamic measure, conditional kink (CK), to quantify this quick loss recovery and investigate its underlying mechanism. Contrary to the managerial skill hypothesis, hedge funds with higher CK underperform in the subsequent year. Furthermore, this underperformance only pertains to funds with low governance, suggesting that some fund managers may engage in ill-motivated activities to recovery. The flow-performance relationship indicates that investors do not recognize this adverse behavior, thus highlighting the importance of internal control and information monitoring in the hedge fund industry. In the third essay, we demonstrate a “reinforcement effect” between past returns and media-measured sentiment across several asset markets – liquid individual stocks, international equity markets, and currencies. Reinforcement states when past returns and media sentiment agree signify overreaction, leading to return reversion. Reversion disappears in non-reinforcing states. The effect is driven by the unrelated shocks, rather than correlated comovement, in past returns and sentiment. Sentiment’s return-forecasting strength comes primarily through greater negative return autocorrelation in reinforcement states. The effect is stronger in more liquid assets and using local news outlets. Buying disparaged losers while selling praised winners earns several percent annually. In the fourth essay, I demonstrate the importance of inter-firm political links, measured by common campaign contributions made by firm executives. Price movements of a firm’s stock are predictable based on stock price movements of connected firms. Cross-predictability is strongest among politically connected firms that operate in different states and sectors, suggesting that inter-firm political links are largely overlooked due to limited investor attention. To probe the underlying mechanism, I present evidence suggesting that common sources of political exposure across firms ex-ante cannot alone explain this relationship; instead, political ties play the key role, further synchronizing ex-post political agendas. Using the 2010 Citizens United v. FEC decision as an exogenous shock, I find that cross-predictability is weaker for firms that are restricted from actively engaging in political campaigns. Long-short stock portfolios based on political ties yield risk-adjusted returns of 4%-5% per annum. / Thesis (PhD) — Boston College, 2019. / Submitted to: Boston College. Carroll School of Management. / Discipline: Finance.

Malgré les évolutions significatives des systèmes de retraite, notamment le passage de systèmes par répartition à des systèmes par capitalisation, plusieurs problèmes subsistent. La structure démographique est un des principaux facteurs de risque systémique, menaçant l’équilibre des caisses de retraite et favorisant l’instabilité et les moindres performances économiques. Dans cette thèse, nous mobilisons l’analyse empirique et théorique afin d’apporter une réponse en termes de stratégie d’investissement à ce problème. Nous synthétisons tout d’abord les éléments de littérature existants et mettons en avant l’importance du partage intergénérationnel du risque et les différences entre les investissements individuels et collectifs. En nous appuyant sur un modèle à générations imbriquées, nous étudions les effets de la structure démographique sur le prix des actifs. Nous identifions une corrélation positive entre l’inverse du ratio de dépendance et le prix de ces derniers (asset meltdown). Puis, en nous basant sur des contrats de retraites simulés, nous étudions les effets de l’augmentation de l’espérance de vie et de la diminution du taux de fécondité sur le partage intergénérationnel du risque. Bien que le régime collectif de retraite à cotisations définies (CDC) amortisse mieux les risques démographiques, des performances analogues peuvent être obtenues au moyen d’une capitalisation individuelle. De plus, la capitalisation individuelle supplante le régime collectif lorsque la réglementation est fortement contraignante. Nos résultats suggèrent la nécessité de la mise en place d’un processus de réforme continu basé sur les stratégies d’investissement. Ainsi, l’efficacité des méthodes de sélection des fonds telles que celle basée sur le taux de faux positifs semble être confirmée. / Despite the substantial evolution of pension systems shifting away from pay-as-you-go scemes at the end of the last century, some significant issues still subsist. Demographic structure is one of the main systemic risks threatening the asset-liability balance and causing insolvability and unsustainable performance. In this dissertation, we use both theoretical and empirical analysis to address this issue and to propose a possible solution based on investment strategy. We first conduct a detailed literature survey, aiming to highlight the importance of inter-generation risk sharing and to characterize the differences between collective and individual investment. Based on a theoretical overlapping generation model we study the effect of demographic structure on the asset prices. We identify a positive correlation between the inverse dependency ratio and the asset price, known as the asset meltdown. Then, focusing on diverse stylized pension contracts, we investigate the effect on inter-generation risk sharing of both an increase in life-expectancy and a decrease in fertility rate. Although the collective defined contribution (CDC) plan better amortizes the demographic risk compared to other contracts, its performance can be replicated by individual investment. Moreover, when regulation imposes strict policy safety constraints, individual investment outperforms the collective plan participation. Our results suggest the need for a continuous reforming process, especially on investment-based strategies. Hence, the efficiency of fund selection methods such as the one based on False Discovery Rate seems to be confirmed.

Fama and French (1995, 1996) argue that the high-minus-low (HML) book-tomarket (B/M) factor in their 1993 three-factor model is a proxy for a distress-risk return premium and that the model is consistent with rational pricing. Alternative views are that the HML premium is caused by irrational behaviour or market inefficiencies. Dichev (1998) finds that high distress-risk firms have low, not high, B/M and earn low returns. He also finds a systematic relation between the distress-risk characteristic and return, independent of the B/M characteristic. The effect of differences in the methodology used by Fama and French (1995) and Dichev (1998) has not been examined. In addition, there is no evidence of whether a distress-risk return premium is important in describing returns. Examination of the characteristics and returns of sorted distress-risk portfolios shows that most high distress-risk, positive book-equity NYSE-AMEX firms do have high B/M. However, for both the NYSE-AMEX and NASDAQ, small firms with high distress-risk have low B/M ratios. A positive relation between distress-risk and return is not found for either NYSE-AMEX or NASDAQ firms. A distress-minus-solvent (DMS) return premium constructed using Fama and French (1993) methodology is negative and significant. Regression results show that both the HML and the DMS factors are important in describing the time-series of returns. However, the HML factor is of only marginal importance when examining sorted distress-risk portfolio returns. In addition, the HML coefficients are related to the B/M characteristic, rather than distress-risk, when both sorted distress-risk and characteristic-balanced portfolio returns are examined. The combined evidence suggests that HML cannot be interpreted as a return premium related to financial distress. However, a systematic relation does exist between distress-risk and return. The evidence supports a market inefficiency or irrational behaviour, rather than a risk based explanation of asset returns. Investors pay too much for financially distressed firms and subsequently earn low returns.

Asset management is an integral part of maintaining and preserving the transportation infrastructure. In order to better manage the roadway assets, a value based on their economic contribution should be assigned. The actual monetary contribution a roadway makes to the overall economy can be difficult to quantify. Because of this difficulty, most agencies use asset valuation techniques that are based on construction and material costs, rather than utilization. This proposed study aims to establish a framework to quantify the economic value of existing roadways. Traditionally in transportation asset management, economic evaluation research has been mostly qualitative in nature and insufficient in generating a numerical value. Although there are many techniques to project the economic impact of a future roadway, there has not been much work done on evaluating the economic value of existing roadway infrastructure. In this thesis, some of the tools used in economic impact studies are adopted as a means to evaluate the value of existing roadways, leading to the development of comprehensive methodological framework as a guide to perform economic evaluation on existing roadways. / text

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This thesis presents the potential opportunities of global asset allocation and the possible enhancement of these opportunities from using a Markov Switching Model. The thesis extends upon previous conditional asset pricing studies in global asset allocation, such as those done by Ilamnen (1995), Harvey, Solnik and Zhou (1992) and Bilson (1993), where expected future returns are forecast based on conditional variables. The finding of these studies, and many others, are combined with the works on Markov Switching models and market segmentation theories to create a uniform structure for analysing regime switching properties in currencies, international equities and international bond markets. This thesis is segregated into 4 major sections. The chapters 1-4 develop a unified framework that is used in the analysis of markets. The chapters 5-7 are focused on currencies, international equities and international bonds. For each market a model is constructed that is based upon the structure proposed by Frankel and Froot (1988). In this model the market is segmented into two groups ?? value based investors and momentum based investors. To replicate this structure, a two regime Markov Switching model is used, where one regime is constructed as a value regime and the second is constructed as a momentum regime. These models are then compared to linear versions of the models, to see whether there is any additional benefit to the application of regime switching methods. In conjunction with testing the potential benefits of the Markov Regime Switching process, this study also investigates the very nature, or characteristics of regime switching in the international markets. This is undertaken though some alternate models and enhancements to see whether there is any predictability, or characterisations can be made of the switching process. To ensure a comprehensive analysis, several analytical methods have been used, including extensive econometric modelling, statistical analysis of forecasts and portfolio back testing. A number of conclusions can be drawn from the results. Firstly it appears that there is substantial evidence of regime switching in international markets, such as that shown in a Frankel-Froot framework. This in turn has major implication for the understanding of the way in which international markets function, and further the empirical evidence supports many of the anecdotal observations of market based participants. Secondly, there appears to be a strong level of economic relevance to the modelling. The models are shown to generate a theoretical economic profit, which shows that the international markets are only semi efficient. Further, forecasts generated from the Markov Switching models outperform the linear counterparts in economic significance in portfolio tests. However, for both equities and bonds, the general accuracy of the forecast tends to be inferior to the linear counterparts. Finally, the nature of regime switching is investigated in detail, particularly in reference to 3 potential drivers ?? greed, fear and success. The evidence shows that these can help explain the characteristics of regime switching, as in some cases potentially adding economic value. However, it seems that success is more important than a broader economic environment.

An extensive body of research supports the momentum strategy's persistence but disagrees on the underlying source of its profitability. A key obstacle to distinguishing between behavioral and rational explanations of momentum is that mispricing is unobservable. This dissertation studies the endogenous relationship between momentum trading and mispricing. The basic idea is that momentum trades can impede arbitrage when they are in the opposite direction of arbitrage trades and reinforce arbitrage when they are in the same direction. A simple model suggests that when momentum trades reinforce the arbitrage process, momentum strategy returns contain relatively less mispricing than when momentum trades impede the arbitrage process. Empirical results show that an arbitrage-reinforcing strategy has significantly higher average returns that are largely related to risk and do not reverse in subsequent periods, while an arbitrage-impeding strategy exhibits significant long-term reversal consistent with more mispricing. Additional tests show that winners have higher future growth rates than losers consistent with cross-sectional differences in expected returns. Overall, the evidence suggests that momentum profitability is largely related to risk which is partially masked by mispricing. An important implication of this model is that, like noise traders, trading strategies that do not condition on relative value can impede arbitrage.