This dissertation investigates the sources of inefficiencies in financial sector and effects of these inefficiencies on the economy. In the first chapter, I analyze the effects of asset prices on financial institutions in a dynamic stochastic general equilibrium model including bank defaults and related agency costs. I find that pecuniary externalities exist in asset prices as decentralized banks do not internalize the effects of their lending on asset price distributions. These externalities lead to excess risk taking and leverage in the financial sector. Excess risk taking behavior deteriorates welfare of both depositors and banks in a stochastic economy. I show that a restricted social planner is able to improve welfare by limiting the leverage in the economy. In planner's problem, robust banking system is more resilient against the shocks. This in turn creates more stable economy with lower bankruptcy costs and increases welfare. Thus, I show that significant economic gains are possible with appropriate regulations in the financial sector. In the second chapter, I examine the welfare effects of pecuniary asset price externalities using a dynamic stochastic general equilibrium model. I show that decentralized financial system is socially inefficient due to pecuniary price externalities. I compare various regulations using quantitative welfare analysis. I find that bailout policies cause moral hazard problems and induce excess risk taking. Therefore, such policies worsen the inefficiency. However, macro-prudential policies limit the leverage and provide resilience against the systemic shocks. Thus, these policies mitigate distortions and improve welfare. Furthermore, I show that combination of bailout and prudential reserve requirement policies is pareto better than other regulations. Finally, I introduce credit default swaps (CDS) into the model and find that CDSs can mitigate the distortions. But the benefits of CDSs are limited to the size of systemic shocks. If systemic shocks are big enough, CDS linkages will make crisis contagious among the financial institutions. In the third chapter, I analyze the impacts of asymmetric information and imperfect monitoring on financial sector using a single period model with agency costs. I solve the model analytically comparing different levels of imperfect monitoring on heterogeneous banks. I find that information asymmetries and noises in monitoring encourage risk taking behaviors among the banks with low loan returns. I also show that these asymmetries cause inefficiently low lending among banks with high loan returns. In the extension of the model, I analyze government's incentive to prevent asymmetric information using regulatory tools such as stress tests. I analytically show that if the government is elected for short term and the rate of low return banks is high in the economy, government won't have incentive to announce real type of the banks.

The fall in housing market prices has played a major role in triggering the Great Recession. This led to the collapse of markets for mortgage-backed securities, and to a precipitous fall in their ratings. This thesis studies the downgrading of mortgaged-backed Collateralized Debt Obligation (CDO), and the factors that drive mortgage default loans. In Chapter 1, I look at the CDO market. The downgrading of the tranches of Collateralized Debt Obligation (CDO) products backed by real estate related assets has caused severe disruptions in the housing and financial markets. The rating agencies have been criticized for the opacity in the rating process of the CDO products and also for giving the CDO tranches higher ratings than they deserved. However, not enough attention has been paid to the decision making process of the agencies to downgrade the CDO tranches. We use data from Moody's CDO database to reconstruct the process through which Moody's eventually downgraded the tranches. We use a discrete hazard rate model to study the variables that were relevant in the downgrading of the tranches of the CDOs. The empirical results show that out of the many CDO specific variables relevant to their ratings made available by Moody's few have any explanatory power beyond the Moody's Deal Scores (MDS). We show that the MDS could be explained by the changes in the Case-Shiller Composite-20 Index and Markit ABX.HE indices. Further analysis shows that Moody's mostly relied on the changes in the Case-Shiller indexes in revising the MDS. In Chapter 2 I look at the factors that influence default rates. The chapter uses a Structural Vector Autoregression (SVAR) model to study the dynamics of the impact of unemployment and home price index shocks on mortgage default rates from 1979 to 2000 and from 2001 to 2010. We first fit the model to the 1979 to 2000 sample and forecast the changes in the national and regional mortgage default rates from 2001 to 2010. The model did a good job in forecasting the actual changes in the mortgage default rates from 2001 to 2007; however, it failed after 2008. The results for the 1979 to 2000 and 2001 to 2010 periods indicate that the dynamic response of the mortgage default rate to unemployment and home price index shocks changed at the national, regional and state levels after 2000. Unemployment and home price shocks seem to have become more important during the 2001 to 2010 period. The two shocks are responsible on average for about 60% of the movement in the regional mortgage default rates during this period. Except for the Pacific region, California and Florida, most of the variations in the mortgage default rates at the national, regional and state levels are explained by the unemployment shocks. The post 2000 results could be attributed to the increase in the number of mortgage loan borrowers who were more susceptible to unemployment and negative home price shocks.

In this thesis, we investigate the existence of relative arbitrage opportunities in a Markovian model of a financial market, which consists of a bond and stocks, whose prices evolve like Itô processes. We consider markets where investors are constrained to choose from among a restricted set of investment strategies. We show that the upper hedging price of (i.e. the minimum amount of wealth needed to superreplicate) a given contingent claim in a constrained market can be expressed as the supremum of the fair price of the given contingent claim under certain unconstrained auxiliary Markovian markets. Under suitable assumptions, we further characterize the upper hedging price as viscosity solution to certain variational inequalities. We, then, use this viscosity solution characterization to study how the imposition of stricter constraints on the market affect the upper hedging price. In particular, if relative arbitrage opportunities exist with respect to a given strategy, we study how stricter constraints can make such arbitrage opportunities disappear.

This dissertation consists of three essays in Financial Economics. The first essay concerns low-income Americans' usage of financial services. Approximately 20% of US households earning less than $30,000 a year do not have checking or savings accounts. Rather than operate within the financial mainstream, these households tend to rely on high-fee "alternative financial services" such as check-cashing and payday loans for carrying out basic financial transactions, for accessing credit, and even for saving. In this essay I examine the effects of opening a bank account, thereby gaining access to mainstream financial services, on financial behavior and "financial wellbeing". Despite significant policy efforts to "bank the poor" in recent years, there has hardly been any research about this question. I use a unique dataset of low-income participants of financial education workshops, and exploit quasi-random variation in the likelihood of opening a bank account after the workshop to overcome selection bias and estimate causal effects. I find that opening an account reduces delinquency and raises the likelihood of credit score improvement. However, contrary to the benefits often ascribed to becoming banked, I find no effects on saving, self-reported overspending, and several measures of "financial wellbeing" such as finances-related stress. Surprisingly, I find only small aggregate effects of opening an account on actual usage of mainstream credit, as measured by credit card ownership, for example. There is heterogeneity in these effects, however, based on an individual's level of financial literacy. Those who graduated high school and who are presumably more financially literate do in fact increase their usage of mainstream credit when they open an account, but those who did not graduate high school do not. This finding is consistent with prior evidence on the links between financial literacy and usage of financial services: the less literate have been shown to be more likely to use alternative financial services, and those who do use mainstream services have been shown to make costly mistakes (e.g. pay high credit card fees). Finally, I find that access to mainstream financial services enhances the effectiveness of financial education: among the workshop participants that I study, opening an account increases self-reported financial literacy. In the second essay I explore the theoretical effects of one of the most important consequences of entering the mainstream financial system: facing a higher rate of return on saving and a lower cost of borrowing. I develop a simple two period life-cycle model of consumption in which voluntary default is possible and examine the effects of favorable changes in saving and borrowing rates on consumer behavior. The incorporation of default in the model is important for its applicability to the effects of entering the mainstream financial system since those who operate outside the mainstream system tend to be low-income individuals who are more prone to default. It is also novel: the effects of interest rate changes on consumer behavior ("the interest elasticity of consumption") are of great importance in economics and have been researched extensively, but the implications of incorporating default in the basic life-cycle model have never been studied. I find that when the cost of default is not sufficiently dependent on the amount defaulted upon, the possibility of default weakens the link between first period consumption and second period utility and leads to overconsumption relative to the no-default model. It also results in a counter-intuitive negative marginal propensity to consume out of wealth: those who are wealthier consume less. It follows that the wealth effects of favorable interest rate changes imply less rather than more consumption and that such rate changes (the ultimate effects of which are determined by the combination of wealth and substitution effects) are more likely to encourage saving and to discourage borrowing than in the no-default model. Favorable rate changes decrease the probability of default and the expected defaulted-upon amount for all savers, who may default on a pre-existing obligation in the model, as well as for borrowers who initially borrow more than some threshold. I extend the model to allow for partial repayment of debt (i.e. delinquency rather than full-scale default) in both periods. I show that decreasing the borrowing rate lowers delinquency by affecting the tradeoff between delinquency and borrowing as means to finance first period consumption. The third essay, co-authored with Andrew Ang and Paul Tetlock, examines asset pricing patterns in over-the-counter (OTC) stocks, which are stocks that trade on either the OTC Bulletin Board (OTCBB) or OTC Link (formerly Pink Sheets, or PS) interdealer quotation system. Compared to stocks that trade on the NYSE, Amex, and NASDAQ ("listed stocks"), OTC stocks are far less liquid, disclose less information, and exhibit lower institutional holdings. We exploit these different market conditions to test theories of cross-sectional return premiums. Compared to return premiums in listed markets, the OTC premium for illiquid stocks is several times higher, the OTC premiums for size, value, and volatility are similar, and the OTC premium for momentum is three times lower. The OTC premiums for illiquidity, size, value, and volatility are largest among stocks that are held almost exclusively by retail investors and those that do not disclose financial information. Theories of differences in investors' opinions and limits on short sales help to explain these return premiums. Our momentum results are most consistent with Hong and Stein's (1999) theory based on the gradual diffusion of information.

This dissertation consists of two distinct chapters. In the first chapter, I study the outsourcing of corporate governance to proxy advisory firms, which are third-party advisors that help institutional investors decide which way to vote on corporate governance issues. Advising equity assets in trillions of dollars, these advisors play a powerful role in shaping corporate governance. First, I model how conflicts of interest arise when a proxy advisor provides advisory services to investors as well as consulting services to corporations on the same governance issues. The advisor can issue biased voting recommendations when expected reputation costs are low, compared to consulting fees. I then study how increased competition can alleviate these conflicts. Using a unique dataset on voting recommendations, I show that the entry of a new advisory firm reduces favorable recommendations for management proposals by the incumbent advisor. This is consistent with our theory as the incumbent is subject to conflicts of interest by serving both investors and corporations. These results inform the policy debate on whether and how to regulate the proxy advisory industry. The second chapter of the thesis assesses the value of access to public transportation in Beijing, a megacity suffering from severe traffic congestion. Existing urban economic theory states that traffic congestion is welfare reducing. In practice, policymakers in congested cities invest heavily in public transit systems to reduce transportation costs. However, not all public transit modes are created equal -- those that help alleviate traffic congestion are the most desirable. Using a unique panel dataset of Beijing's residential properties on sale between 2003 and 2005, I find strong evidence that traffic delays translate into lower housing prices, confirming that congestion is costly. Moreover, I show that announcements of metro line construction inflate prices of properties near future stations, and the increase is even more staggering for more congested areas. This suggests that metro lines are expected to reduce adverse impacts of congestion. However, additional bus routes are not capitalized into prices because buses move slowly in the gridlocked city, often exacerbating rather than alleviating congestion. These findings suggest that the overall quantity of public transit services does not necessarily increase welfare.

This dissertation consists of three essays on corporate finance. In the first chapter, I investigate how a liquidity cost associated with debt- `debt servicing cost' affects a firm's capital structure policy. In contrast to the standard capital structure theory prediction that builds on a trade-off between interest tax shields and expected bankruptcy costs, public firms use debt quite conservatively. To address this well known debt conservatism puzzle (Graham 2000), I argue that servicing debt drains valuable liquidity for a financially constrained firm and hence endogenously creates `debt servicing costs,' which have received little attention in the literature. To examine the influence of debt servicing costs on capital structure choices, I develop and estimate a dynamic corporate finance model with interest tax shields, liquidity management, investment, external debt and equity financing costs, and capital adjustment costs. By using the marginal value of liquidity as a natural measure of the debt servicing costs, I find that (1) an increase in financial leverage results in higher debt servicing costs, even with risk-free debt. (2) a smaller firm tends to experience greater debt servicing costs because of its endogenously large investment demands; and (3) in the majority of cases, equity proceeds are used for cash retention as well as capital expenditure, especially when a firm faces large current and future investment needs. In addition, I quantitatively show that large debt servicing costs are closely associated with low leverage and frequent equity financing by analyzing the role of fixed operating costs and convex capital adjustment costs. In the second chapter, I empirically support the theoretical debt servicing costs analysis of the previous chapter. I firstly examine the structural estimation method used for the calibration of my model in the first chapter. The statistical property of the simulated method of moments estimator and detailed identification scheme for the calibration are investigated in the first half of this chapter. Then I cross-sectionally confirm the validity of debt servicing costs predictions on capital structure choices. I study how each firm's convex capital adjustment costs, operating leverage, profit volatility, and future investment needs influence capital structure policies. Consistent with the debt servicing costs predictions, firms with higher convex capital adjustment costs, higher operating leverage, higher profit volatility and larger future investment demands show lower leverage ratios and more frequent equity financing activities. These findings shed new lights on pervasively conservative debt policy in U.S. public firms. A higher profitability observed in large future investment demands firms also suggests the importance of debt servicing costs consideration in resolving the puzzling negative correlation between profitability and leverage ratios. In the third chapter, I examine how macroeconomic conditions affect the cyclical variations in capital structure policies. As in the financial crisis of 2008, economic contractions affect a firm's profitability, investments and external financing conditions altogether. To address the effects of these simultaneous changes on capital structure dynamics, I develop and estimate a dynamic trade-off model with investment, payouts, and liquidity policies with macroeconomic profitability and financing shocks. Investment dynamics and a higher value of liquidity of economic downturn are pivotal in capital structure dynamics; the former drives the issuance of debt and equity, and the latter leads to active debt retirements and conservative debt issues in upturns. My model yields the following main results: (1) Equity issues are pro-cyclical, and concentrated for small, low profit, and large investment demand firms in earlier stage of economic upturns. (2) Payouts peak in later stages of upturns and co-move positively with equity issues; (3) Debt policies move counter-cyclically, and leverage ratios after debt issuance and retirement are even higher during economic downturns. My comparative static analysis predicts pro-cyclical debt policy for financially constrained firms, and pervasively conservative use of debt for firms expecting financial market shutdowns, a sharp profitability drop, or a longer stay in economic downturns.

Unlike other costs of trading, capital gains taxes are not well understood. The tax cost of selling an asset includes the present value change in current and future tax liabilities caused by the sale. Investors paying a positive capital gains tax often face a negative tax cost of selling, thanks to other features of the tax code that are inextricably linked to the existence of capital gains taxes: depreciation or amortization allowances. The conclusion that capital gains taxes "lock in" investors to their appreciated stocks is a product of stocks' ad-hoc tax rules and cannot be generalized to other asset classes. In the first chapter of this thesis I define Theta, an approximate measure of the tax cost of selling an asset. Based on this measure, I show that property and casualty insurers are mildly reluctant to sell appreciated taxable bonds, but very reluctant to sell appreciated tax exempt bonds. Selling appreciated taxable bonds is cheap: because of premium amortization, one dollar of gain realized today is matched by a one-dollar reduction in the taxable part of future interest income. Selling appreciated tax-exempt bonds, however, is expensive because future interest income is already tax-exempt. I confirm my prediction using regulatory filings that contain book value, fair value, and transactions for all insurers' bond positions. Taxes are a first-order factor in the decision (not) to sell appreciated tax-exempt bonds in the period leading up to the 2008 financial crisis; during the crisis, however, trading motives other than taxes prevail temporarily. In the second chapter, I apply the insight from the first part to the optimal trading of tax exempt bonds, a four-trillion-dollar market where essentially every investor is taxable. Here I solve for the optimal realization of taxable gains and losses for investors in tax exempt bonds, and show that Theta provides an investor with a good quality "sell" signal without solving a full-blown dynamic programming problem. Given the optimal trading strategy, I then solve for the coupon rate that maximizes a rational investor's value. Because the coupon, not the yield, is tax exempt, setting a high coupon rate ensures that the bond stays fully tax exempt even if later it trades at a higher yield. Trading optimally yields gains of up to 7% of issue price compared to a buy-and-hold strategy. Issuing optimally yields gains of up to 3.5% of issue price compared to issuing at par, potentially larger than the cost of issuance itself. All these gains are transfers from the U.S. Treasury to local issuers and to investors. Optimal issuance patterns are consistent with two previously unexplained but well-known stylized facts: the frequent issuance of premium bonds, and "sticky" coupons that don't fall when yields fall; and with a third, previously undocumented, stylized fact: issue prices of noncallable tax-exempt bonds are increasing in time to maturity. In the last chapter, I show that Theta---an easy-to-compute, partial-equilibrium measurement that ignores equilibrium feedback---is an excellent first-order approximation to its general-equilibrium counterpart. Partial-equilibrium tax arbitrage constructs like Theta are useful in analyzing complex tax problems, but they are approached with distrust by proponents of a folk "no-trade theorem": in a general equilibrium setting "prices will adjust", and arbitrage opportunities will disappear. However, in an equilibrium with capital gains taxes, a taxable representative agent will rarely be indifferent between trading and not trading; sometimes refusing to sell assets (the "lock-in effect"), sometimes selling and buying back to realize all gains or losses. Both types of equilibrium, as well as a proper "tax neutrality" equilibrium, are feasible for a "reasonable" capital gains tax rate (bounded between zero and the ordinary income tax rate). Prices adjust only so much, for two reasons: first, tax trading does not affect demand for and supply of securities, affecting prices only indirectly through government revenue; second, the amount of gains or losses that can be realized is naturally constrained between zero and the amount of existing unrealized gains and losses.

This dissertation delves into the relation between asset returns, risks, and cash flow expectations. The first chapter uses the model-implied patterns of cash flow expectations to differentiate among the three most prominent behavioral theories explaining stock return momentum and reversal. Using analyst earnings forecasts as a proxy for cash flow expectations, I trace the dynamics of the expectation errors for winner and loser stocks in a 24-month holding period, during which returns are characterized by a momentum phase followed by a reversal phase. The large positive cross-sectional difference in expectation errors between winner and loser stocks gradually shrinks to zero over the holding period. This pattern is most consistent with the underreaction hypothesis in Hong and Stein (1999), in which cash flow expectation errors can only explain momentum, and price extrapolation is needed to explain reversal. The second chapter examines carry trade returns formed from the G10 currencies. Performance attributes depend on the base currency. Spread-weighting and risk-rebalancing positions over time improve performance. Hedging with options reduces profitability. Equity, bond, FX, and volatility risks cannot explain profitability. Time-varying dollar exposure produces abnormal excess returns. Dollar-neutral carry trades exhibit insignificant abnormal returns, while the dollar exposure part of the carry trade earns significant alphas and little skewness. Downside equity market betas of carry trades are not significantly different from unconditional betas. Distributions of drawdowns and maximum losses from daily data indicate the importance of autocorrelation in determining the negative skewness of longer horizon returns. The third chapter investigates the question of whether sovereigns pay a premium on their own borrowing as a result of (implicitly or explicitly) guaranteeing sub-entities' debt has been explored only little. We use an event study approach with separate equations for two levels of government to test for a simultaneous increase in sovereign risk premia and decrease in sub-national risk premia--or a de facto transfer of risk from the latter to the former--on the day a sovereign bailout is announced. Using daily financial market data for Spain and its autonomous regions from January 2010 to June 2013, we find support for our risk transfer hypothesis. We estimate that the Spanish sovereign's spread may have increased by around 70 basis points as a result of the central government's support for fiscally distressed comunidades autónomas.

This dissertation consists of three essays in asset pricing. The first essay demonstrates the application of a Bayesian methodology of regressor selection to factor pricing models. Bayesian Variable Selection (BVS) algorithms offer robust, intuitive methods for determining the inclusion of specific regressors within a regression framework. These algorithms can be vastly more efficient than traditional, frequentist approaches. After constructing a BVS framework, I apply this methodology to test a factor asset-pricing model, using 270 different portfolios, spanning 8 different sorting characteristics, onto 5 popular factors - the Fama-French factors (SMB, HML, MKT), a measure of aggregate "liquidity" (the Pastor-Stambaugh liquidity measure from Pastor and Stambaugh (2003)), and the Carhart measure of momentum (UMD). Results show that the Fama-French three factors have average inclusion probabilities of .93, .69, and .66, respectively. There is marginal evidence that the momentum risk factor is priced (.22 probability of inclusion). There is little evidence that the measure of liquidity is priced (.11 probability of inclusion). The apparent nonpricing of liquidity may be due to even liquidity-spreading across portfolios. Applying BVS to the CRSP universe of individual securities from 1962 to 2008, I find a notable reduction in the MKT factor (an average inclusion of .19), an increase in the intercept (the stock ɑ), a reduction in the inclusion of the momentum factor, and an inclusion of the liquidity factor of .21. This suggests that the liquidity measure is more relevant when pricing individual securities, and the momentum factor is more relevant when pricing portfolios. In the second essay, I explore one potential channel in which firms are exposed to the idiosyncratic shocks to the returns of other, seemingly unrelated, firms. This essay expands our understanding of flow-related price pressure by demonstrating that induced flow is one channel in which idiosyncratic shocks can affect seemingly unrelated firms (controlling for common factor and industry shocks). Looking at mutual fund portfolios and instrumenting to address potential flow/return endogeneity, I find that the shocks to other firms in common mutual fund portfolios induce future portfolio flows, which induce portfolio rebalancing and result in temporary price pressure on a given firm. A one standard deviation increase in the flow-induced price pressure corresponds to a .15-.6% increase in daily abnormal firm returns. This pressure fully reverses in 5-6 days, and the magnitude is larger if funds experience a net outflow than if they experience a net inflow. Liquid firms are more sensitive than illiquid firms to this price pressure. These findings are consistent with the hypothesis that managers experiencing a portfolio return shock adjust the most liquid assets in expectation of fund flows. If investors are unable to properly estimate the correlations induced by being in common portfolios, they are unable to fully diversify away idiosyncratic risk. Finally, the third essay, co-authored with Li An, further expands our understanding of mutual fund managers and the pricing effects that result from their trading behavior. This study investigates a V-shaped disposition effect - the tendency to sell relatively big winners and big losers - in the trading behavior of mutual fund managers. We find that a 1% increase in the magnitude of unrealized gains (losses) is associated with a 4.2% (1.6%) higher probability of selling. We link this trading behavior to equilibrium prices and find, consistent with the relative magnitude found in the selling behavior regressions, that a 1% increase in the magnitude of gain (loss) overhang predicts a 1.4 (.9) bp increase in future returns. An overhang variable capturing the V-shaped disposition effect strongly dominates the monotonic capital gains overhang measure of previous literature in predictive return regressions. Alternative V-shaped overhang measures produce similarly consistent results. One of the major contributions of this essay is to step beyond simply documenting the existence of this behavior among mutual fund managers and to shed light on the other predominant characteristics of the managers that are most likely to manifest this effect. Funds with higher turnover, shorter holding period, higher expense ratios, and higher management fees are significantly more likely to manifest a V-shaped disposition effect.

This dissertation consists of three essays on investor behavior and asset pricing. In the first chapter, I investigate the asset pricing implications of a newly-documented refinement of the disposition effect, characterized by investors being more likely to sell a security when the magnitude of their gains or losses on it increases. Motivated by behavioral evidence found among individual traders, I focus on the pricing implications of such behavior in this chapter. I find that stocks with both large unrealized gains and large unrealized losses, aggregated across investors, outperform others in the following month (monthly alpha = 0.5-1%, Sharpe ratio = 1.6). This supports the conjecture that these stocks experience higher selling pressure, leading to lower current prices and higher future returns. This effect cannot be explained by momentum, reversal, volatility, or other known return predictors, and it also subsumes the previously-documented capital gains overhang effect. Moreover, my findings dispute the view that the disposition effect drives momentum; by isolating the disposition effect from gains versus that from losses, I find the loss side has a return prediction opposite to momentum. Overall, this study provides new evidence that investors' tendencies can aggregate to affect equilibrium price dynamics; it also challenges the current understanding of the disposition effect and sheds light on the pattern, source, and pricing implications of this behavior. The second chapter extends the study of the V-shaped disposition effect - the tendency to sell relatively big winners and big losers - to the trading behavior of mutual fund managers. We find that a 1% increase in the magnitude of unrealized gains (losses) is associated with a 4.2% (1.6%) higher probability of selling. We link this trading behavior to equilibrium price dynamics by constructing unrealized gains and losses measures directly from mutual fund holdings. (In comparison, measures for unrealized gains and losses in chapter one are approximated by past prices and trading volumes.) We find that, consistent with the relative magnitude found in the selling behavior regressions, a 1% increase in the magnitude of gain (loss) overhang predicts a 1.4 (.9) basis ppoints increase in future one-month returns. A trading strategy based on this effect can generate a monthly return of 0.5% controlling common return predictors, and the Sharpe ratio is around 1.4. An overhang variable capturing the V-shaped disposition effect strongly dominates the monotonic capital gains overhang measure of previous literature in predictive return regressions. Funds with higher turnover, shorter holding period, higher expense ratios, and higher management fees are significantly more likely to manifest a V-shaped disposition effect. The third chapter studies how the recourse feature of mortgage loan has impact on borrowers' strategic default incentives and on mortgage bond market. It provides a theoretical model which builds on the structural credit risk framework by Leland (1994), and explicitly analyzes borrowers' strategic default incentives under different foreclosure laws. The key results are, while possible recourse makes the payoff in strategic default less attractive, it helps deter strategic default when house price goes down. I also examine the case when cash flow problems interact with default incentives and show that recourse can help reduce default incentives, make debt value immune to liquidity shock, and has little impact on house equity value.