The explanatory power of six asset-pricing models are tested and compared in this study. The models include the four known asset pricing models: the CAPM, the Fama and French's (1996) Three-Factor model, the Carhart's (1997)'s Four-Factor model, a model similar to Zepeda's (1999) Five-Factor model. Additionally, it includes two new models - the Five-Factor-Volume (5F-V) model and the Six-Factor model, which are developed in line with Ross's (1976) Arbitrage Pricing Theory.

High dimensional covariance matrix estimation is considered in the context of empirical asset pricing. In order to see the effects of covariance matrix estimation on asset pricing, parameter estimation, model specification test, and misspecification problems are explored. Along with existing techniques, which is not yet tested in applications, diagonal variance matrix is simulated to evaluate the performances in these problems. We found that modified Stein type estimator outperforms all the other methods in all three cases. In addition, it turned out that heuristic method of diagonal variance matrix works far better than existing methods in Hansen-Jagannathan distance test. High dimensional covariance matrix as a transformation matrix in generalized least squares is also studied. Since the feasible generalized least squares estimator requires ex ante knowledge of the covariance structure, it is not applicable in general cases. We propose fully banding strategy for the new estimation technique. First we look into the sparsity of covariance matrix and the performances of GLS. Then we move onto the discussion of diagonals of covariance matrix and column summation of inverse of covariance matrix to see the effects on GLS estimation. In addition, factor analysis is employed to model the covariance matrix and it turned out that communality truly matters in efficiency of GLS estimation.

We analyze four alternative energy mutual funds using a multi-factor capital asset pricing model with generalized autoregressive conditionally heteroskedastic errors (CAPM-GARCH). Our findings will help portfolio managers and others who seek to predict the return on investment in alternative energy firms. We find that alternative energy firms tend to be riskier than the general US stock market, have a low, but significant and positive response to oil prices, and have a significantly high and negative response to the value of the dollar relative to other currencies. Our results also suggest that alternative energy firms should hedge against currency exchange rate fluctuation.

Thesis (M.S.)--University of North Carolina Wilmington, 2009. / Title from PDF title page (February 17, 2010) Includes bibliographical references

Thesis (M.B.A.)--University of Hong Kong, 1984.

Thesis (M.B.A.)--University of Hong Kong, 1981.

Thesis (Ph. D.)--University of California, San Diego, 2003. / Vita. Includes bibliographical references.

Starting from the most famous Black-Scholes model for the underlying asset price, there has been a large variety of extensions made in recent decades. One main strand is about the models which allow a jump component in the asset price. The first topic of this thesis is about the study of jump risk premium by an equilibrium approach. Different from others, this work provides a more general result by modeling the underlying asset price as the ordinary exponential of a L?vy process. For any given asset price process, the equity premium, pricing kernel and an equilibrium option pricing formula can be derived. Moreover, some empirical evidence such as the negative variance risk premium, implied volatility smirk, and negative skewness risk premium can be well explained by using the relation between the physical and risk-neutral distributions for the jump component. Another strand of the extensions of the Black-Scholes model is about the models which can incorporate stochastic volatility in the asset price. The second topic of this thesis is about the replication of exponential variance, where the key risks are the ones induced by the stochastic volatility and moreover it can be correlated with the returns of the asset, referred to as leverage effect. A time-changed L?vy process is used to incorporate jumps, stochastic volatility and leverage effect all together. The exponential variance can be robustly replicated by European portfolios, without any specification of a model for the stochastic volatility. Beyond the above asset pricing and hedging, portfolio optimization is also discussed. Based on the Merton (1969, 1971)'s reduced portfolio optimization and the delta hedging problem, a portfolio of an option, the underlying stock and a risk-free bond can be optimized in discrete time and its optimal solution can be shown to be a mixture of the Merton's result and the delta hedging strategy. The main approach is the elasticity approach, which has initially been proposed in continuous time. In addition to the above optimization problem in discrete time, the same topic but in a continuous-time regime-switching market is also presented. The use of regime-switching makes our market incomplete, and makes it difficult to use some approaches which are applicable in complete market. To overcome this challenge, two methods are provided. The first method is that we simply do not price the regime-switching risk when obtaining the risk-neutral probability. Then by the idea of elasticity, the utility maximization problem can be formulated as a stochastic control problem with only a single control variable, and explicit solutions can be obtained. The second method is to introduce a functional operator to general value functions of stochastic control problem in such a way that the optimal value function in our setting can be given by the limit of a sequence of value functions defined by iterating the operator. Hence the original problem can be deduced to an auxiliary optimization problem, which can be solved as if we were in a single-regime market, which is complete. / published_or_final_version / Statistics and Actuarial Science / Doctoral / Doctor of Philosophy

This dissertation describes two theories of risky choice based on a normatively axiomatized partial order. The first theory is an atemporal alternative to von Neumann and Morgenstern's Expected Utility Theory that accommodates the status quo bias, violations of Independence and preference reversals. The second theory is an extension of the Inter-temporal von Neumann-Morgenstern theory of Kreps and Porteus (1978) that features a normatively deduced preference for flexibility. A substantial part of the thesis is devoted to examining equilibrium implications of the inter-temporal theory. In particular, a multi-agent multi-period Bayesian rational expectations equilibrium is shown to exist under certain conditions. Implications to asset pricing are then investigated with an explicit parameterization of the model.

This dissertation consists of two essays dealing with two selected aspects of the investment decision process faced by individuals and corporations. In the first essay, I develop a model of a multiple-stage patent race between two rival firms to study the impact of technological competition on value and return dynamics of Research and Development (R&D) ventures. The model describes a firm's capital budgeting decision process in the presence of technical uncertainty, market uncertainty and preemption. I characterize the equilibrium of the race and derive optimal investment strategies. Analysis of the equilibrium firm value shows that the premium accruing to the technology "leader" is larger than the loss accruing to the technology "lagger" and that the marginal effect of success/failure is increasing in the uncertainty of cash flows. Risk premia demanded by an ownership claim to competing R&D ventures (i) increase when a rival pulls ahead in the race and (ii) are lower when rivals are "closer" to each other in the development process. Compared to the case where rival firms merge, R&D competition reduces the industry value and lowers the expected completion time for a project. The erosion in value, due to preemption, is higher when firms are "neck-and-neck" and in early stages of development. Numerical simulations show that, in later stages of development, risk premia demanded by the perfectly collusive market are generally lower than risk premia demanded by a portfolio of competing firms. The opposite is true in early stages of development, which suggests that R&D competition may actually lower the cost of early stage financing. In the second essay, I solve a portfolio allocation problem for an individual who can select between two risky assets and a riskless asset in the presence of capital gains taxes. I treat capital gains taxes as a form of endogenous transaction costs. Using this analogy, I characterize the trading strategy for the two assets, and study the effect of taxes on optimal portfolio diversification. The optimal strategy contains a "no trade" region and a dynamic tax-timing option. I find that the diversification costs due to capital gains taxes are substantial and the value of the tax deferral option is decreasing in the correlation among assets and in the volatility of the risky assets. By comparing the solution of the multiple asset portfolio problem to the one of an investor who can trade only in a mutual fund I am able to measure the value of the flexibility option of the multi-asset case as well as the cost of mutual fund turnover. Finally, I show that imposing a wash-sale constraint generates discontinuous portfolio rebalancing strategies.