In this thesis, we study insider trading and consider a financial market and an enlarged financial market whose sets of information are respectively represented by the filtrations F and G. The filtration G is obtained by initially expanding the filtration F. We also consider that we have a finite trading horizon. First, we show that under certain conditions the enlarged market satisfies no free lunch with vanishing risk (NFLVR) locally and therefore satisfies no arbitrage with respect to admissible simple predictable trading strategies. In addition, we generalize the structure of all the G local martingale deflators and find sufficient conditions under which the enlarged market satisfies NFLVR. We apply our results to some recent examples of insider trading that have appeared in newspapers and by doing so, show the limitations of some previous works that have studied the stability of the NFLVR property under an initial expansion. \newline Second, assuming the enlarged market satisfies NFLVR and markets are incomplete, we define a notion of risk and compare the risk of a market or liquidity trader to the risk of an insider trader. We prove that the risk of an insider is smaller than the risk of a market/liquidity trader under some sufficient conditions that involve their respective trading strategies. We find a relationship between the trading strategies of a market trader and of an insider when the risk neutral measure of the market is used. If an insider trades using the market risk neutral measure and not her own, then her trading strategy should involve not only the stock but also the volatility of the stock. \newline Finally, assuming that the enlarged market satisfies NFLVR locally, we provide a way for an insider to price her financial claims. We also define a new type of process that we call a quasi-local martingale and prove that the stock price process under local NFLVR is one such process.

This dissertation contains three essays in macroeconomics and finance. Chapter 1 estimates the relative importance of agents receiving advance information or having distorted beliefs about future fundamentals in explaining a set of macroeconomic and financial data. Chapter 2 proposes a new measure of time-varying aggregate uncertainty, which is based on information from a large panel of macroeconomic and financial time series. Chapter 3 explores how imposing risk constraints on financial intermediaries in a continuous-time heterogeneous-agent economy can affect equilibrium allocations and asset price dynamics. Fluctuations in the beliefs of economic agents can be driven by current fundamentals, advance information about future fundamentals, or distortions resulting from informational or psychological limitations. Chapter 1 presents a dynamic stochastic general equilibrium (DSGE) model that jointly considers all three possibilities and estimates their relative importance for explaining macroeconomic and financial data. In the model, agents' beliefs are based on a subjective probability measure that can be stochastically distorted relative to the objective measure. By directly parameterizing the Radon-Nikodým process linking these two measures, it is possible to solve the model under the subjective measure and change back to the objective measure for estimation. To help the model jointly explain macroeconomic and financial data, it features recursive preferences alongside a number of more standard business-cycle frictions. To facilitate estimation, a solution method is presented that allows risk premia to affect the model's linear-approximate dynamics. To discipline the estimates, direct data on subjective forecasts is included in the set of observable variables. Results indicate that both advance information and distorted beliefs are important. On average about two-thirds of the fluctuations in endogenous variables can be attributed to these two sources. While they are equally important for explaining output and employment, advance information is most important for explaining inflation and investment, and distorted beliefs are most important for explaining stock returns and consumption. Chapter 2 exploits a data rich environment to provide direct econometric estimates of time-varying macroeconomic uncertainty. The estimates display significant independent variations from popular uncertainty proxies, suggesting that much of the variation in the proxies is not driven by uncertainty. Quantitatively important uncertainty episodes appear far more infrequently than indicated by popular uncertainty proxies, but when they do occur, they are larger, more persistent, and more correlated with real activity. The estimates provide a benchmark to evaluate theories for which uncertainty shocks play a role in business cycles. Finally, Chapter 3 studies the general equilibrium effects of introducing a Value-at-Risk (VaR) constraint into a dynamic continuous-time economy with homogeneous preferences, inefficient endogenous volatility, fire sales, and economically valuable financial intermediation. The main finding is that through its impact on the stationary distribution of wealth in the economy, a VaR constraint can reduce the average level of endogenous volatility and lower the probability of entering a crisis regime. It does so by forcing agents to sell off their risky asset holdings earlier than they otherwise would, while they still have a large equity buffer to absorb losses. This chapter is the first study to explore the effects of a VaR constraint in a model that does not feature any heterogeneity in preferences or beliefs, and in which endogenous volatility and crises are socially inefficient.

This dissertation consists of three essays on financial economics. In the first chapter, jointly written with Yeon-Koo Che and Chongwoo Choe, we focus on observations during the recent financial crisis that financially distressed firms may be reluctant to accept government bailouts for fear that it may signal the weakness of their balance sheets and inhibit future financing. To capture such bailout stigma, we develop a dynamic model in which a firm must finance projects by selling legacy assets. The value of the asset is the firm's private information, which results in inefficient trading of the asset due to standard adverse selection. Although the adverse selection problem creates a scope for government intervention, accepting a bailout can signal the toxicity of the asset, which worsens the adverse selection for the firm in the subsequent trading of its asset. We find multiple equilibrium responses to a government bailout. Bailout terms that would otherwise be acceptable may be refused due to the stigma. Even terms that are so generous as to be acceptable for firms with non-toxic assets may result in low take-up; nevertheless, such a policy could be beneficial indirectly by allowing a firm to improve its market perception by refusing the bailout. Bailout that leads to immediate market rejuvenation is welfare-dominated by an equilibrium without such market rejuvenation. We further explore an optimal design of a bailout program both in offer terms and formats and show that a secret bailout that conceals the identity of its recipient can mitigate the stigma and can implement the (constrained) efficient outcome. The second chapter is motivated by a situation in which when a firm is financially distressed, it is uncertain whether the distress stems from an unfolding economic crisis or excessive risk-taking by the firm. I analyze how these uncertainties as well as a government's desire to control future moral hazard influence a bailout decision. To this end, I develop a two-period model in which the government privately receives a signal on the unknown state of the economy. In this model, bailing out a distressed firm influences the belief about the state held by another firm in the later period, yielding two conflicting effects. First, the bailout indicates an increased chance that the economy is in crisis, which discourages the later firm from risk taking. Second, it signifies an increased likelihood of future bailout, which encourages risk taking. When the prior probability of crisis is low, the latter effect dominates. Hence, the government takes a tougher stance, bailing out less frequently than it would without the long-term consideration. When the prior probability of crisis is high, the former effect dominates. Therefore, the government takes an alarmist stance, bailing out more frequently than it would without the long-term consideration. The third chapter analyzes how the government's strategic disclosure of its superior information on an aggregate uncertainty influences risk taking by a firm. The government is often tempted to strategically disclose its superior knowledge to influence management of financial risk by a firm. To capture this, I develop a static model in which the government with private information sends a cheap-talk message to the firm before assuming its risk taking. The private signal determines the government's inclination to bailout of a distressed firm because it is used to assess the source of this financial distress. If the private signal increases the government's inclination to bailout, the government may have an incentive to lie and send the opposite message, thereby preserving market discipline. However, the firm rationally infers this strategic disclosure, and therefore, may assume excessive risk taking no matter what messages does it receive from the government. Consequently, an informative equilibrium may worsen moral hazard compared to the babbling equilibrium.

This dissertation investigates, both theoretically and empirically, how does the macroeconomic volatility, in particular, consumption growth, GDP growth and inflation volatility, affect asset prices in equity, bond and currency markets. In all three chapters of the dissertation I use the Bad Environment-Good Environment structure of Bekaert and Engstrom (2014) to model macroeconomic volatility. The key advantage of the approach is that it allows to model non-Gaussian features important in macroeconomic dynamics while yielding closed-form asset pricing solutions and being relatively efficient to estimate. In the first chapter of the dissertation I show that an external habit model augmented with a heteroskedastic consumption growth process reproduces well known domestic and international bond market puzzles, considered difficult to replicate simultaneously. Domestically, the model generates an upward sloping real yield curve and realistic violations of the expectation hypothesis. Depending on the parameters, the model can also generate a downward sloping real yield curve and predicts that the expectation hypothesis violations are stronger in countries with upward sloping real yield curves. Internationally, the model explains violations of the uncovered interest rate parity. Unlike a standard habit model, the model simultaneously features intertemporal smoothing to match domestic real yield curve slope and bond return predictability and precautionary savings to reproduce international predictability. The model also replicates the imperfect correlation between consumption and bond prices/exchange rates through positive and negative consumption shocks affecting habit differently. Empirical support for the model mechanisms is provided. In the second chapter, coauthored with my advisor Geert Bekaert and Eric Engstrom of Board of Governors of the Federal Reserve System, we extract aggregate supply and demand shocks for the US economy from data on inflation and real GDP growth. Imposing minimal theoretical restrictions, we obtain identification through exploiting non-Gaussian features in the data. The risks associated with these shocks together with expected inflation and expected economic activity are the key factors in a tractable no-arbitrage term structure model. Despite non-Gaussian dynamics in the fundamentals, we obtain closed-form solutions for yields as functions of the state variables. The time variation in the covariance between inflation and economic activity, coupled with their non-Gaussian dynamics leads to rich patterns in inflation risk premiums and the term structure. The macro variables account for over 70\% of the variation in the levels of yields, with the bulk attributed to expected GDP growth and inflation. In contrast, macro risks predominantly account for the predictive power of the macro variables for excess holding period returns. In the final chapter, I embed the macroeconomic dynamics from the second chapter into an external habit model to analyze the time-varying stock and bond return correlations. Despite featuring flexible non-Gaussian fundamental processes, the model can be solved in closed-form. The estimation identifies time-varying "demand-like" and "supply-like" macroeconomic shocks directly linked to the risk of nominal assets and matches standard properties of US stock and bond returns. I find that macroeconomic shocks generate sizeable positive and negative correlations, although negative correlations occur less frequently and are smaller than in data. Historically, macroeconomic shocks are most important in explaining high correlations from the late 70's until the early 90's and low correlations pre- and during the Great Recession.

This dissertation consists of three essays in financial intermediation, heterogeneous agents, and asset pricing. In the first essay, I extract mutual fund flows that respond to the active change in equity share of mutual funds and show that they have significant predictability of market return. These “market timing-sensitive (MT-sensitive) flows” have predictability of the overall market over the next two to twelve months, without evidence of reversal. This predictability holds even when controlling for other macroeconomic variables and market sentiment index. I report that mutual fund managers who enjoy MT-sensitive inflows outperform the managers with MT-sensitive outflows over the next quarter. Also, I show that investors whose mutual fund investments mimic MT-sensitive flows have market timing ability, and outperform investors with mutual fund investments in the opposite direction to MT-sensitive flows. In the second essay, I analyze mutual fund investors' responses to changes in funds' allocations to emerging markets. I show that such flows predict positive abnormal returns in emerging markets at quarterly and annual horizons. When there is one standard deviation shock to the EMT-sensitive flows, a six-month equal-weighted emerging market return is expected to be 3.58% in excess of risk-free rate in the US, and 1.69% in excess of US stock market excess return. This predictability holds even when controlling for other macroeconomic variables. The evidence suggests fund investors collectively possess valuable information about emerging markets. The third essay proposes a general equilibrium model with bounded rationality that explains both endogenous learning and price. If agents are bounded rational, in that they do not have complete processing capacity as assumed in rational expectations models, there is a role for endogenous allocation of resources to learning about the economy. Investors trade off learning about different elements, such as terminal dividend (asset fundamental) vs. market structure (aggregate demand schedules). I found that investors prefer to learn what others do not learn, and this explains why there is specialization in the investment. Investors tend to be fundamentalists when market is uncertain, but learning also depends on capacity, ratio of sophisticated investors, risk aversion, etc. I analyze the trade-off between these information sources, and the implications for price efficiency, risk, and return, in a general equilibrium.

This dissertation delves into ownership structure and corporate governance. The first chapter investigates the causal link between business group affiliation and new firms' profitability. To overcome selection issues related to group affiliation, I focus on ownership changes at least two levels away in the ownership chain that lead to a change in group affiliation. I provide evidence suggesting that these "unintentional" changes are likely exogenous. I find that business group affiliation leads to a 12% increase in new firms' profitability during the first six years. I further present evidence consistent with two channels. First, new firms quickly increase revenues and expand market shares after joining business groups, possibly leveraging on groups' marketing networks. Second, group affiliation triggers a higher ratio of top manager turnover and leads to more experienced top managers and more productive employees. It is possible that business groups provide a talent pool of managers and better monitor new firms' labor force. Results suggest that business groups parallel the role of venture capital firms in sponsoring new firms in economies with concentrated equity ownership. The second chapter examines the impact of input and product market competition on private benefits of control (PBC), as measured by the voting premia between shares with differential voting rights. The main findings are three. First, increases in the intensity of competition lead to lower estimates of PBC. Second, competition significantly reduces the dispersion in the voting premia, affecting especially the top of the PBC distribution. Third, competition effects are particularly prominent in weak-rule-of-law countries, in manufacturing industries and in less-profitable firms. Overall, the results show that competition leads to a meaningful reduction in the level and dispersion of PBC. The third chapter directly examines the correlation between insider trading and executive compensation at the firm level. Using panel data on US firms from 1992 to 2011, we find that 1% decrease in cash compensation leads to a 21.7 percentage points increase in 6-month buy-and-hold excess returns, as well as a large increase in trading profits. These results indicate that insiders are using insider trading as a substitute to cash compensation, and keeping the total direct compensation level less volatile than previous research relied on. This effect is robust to exogenous shock to insider trading return, such as Sarbanes-Oxley Act of 2002. The result suggests the importance to take into account of insider trading profit in context of executive compensation.

This thesis advances the research on the quadrature (QUAD) method. We aim to make it more computationally efficient, apply it to different underlying processes and even develop a new breed of QUAD method. QUAD is efficient in many ways except when it comes to options with early exercise opportunities such as Bermudan or American options. We develop a series of acceleration techniques for the QUAD method to improve its implementation. After that, we show how to apply the accelerated QUAD method to pricing American options under lognormal jump diffusion and stochastic volatility jump diffusion processes. QUAD is more efficient in dealing with jump processes compared with other numerical techniques such as the finite difference method and the Monte Carlo method, as long as the transition probability density of those processes are known. When the transition probability density is not known in closed-form, this thesis explores a new approach by combining the finite difference method with QUAD (FD-QUAD) - since density can be calculated numerically using the finite difference methods. Overall, this thesis greatly improves and advances the quadrature method in option pricing.

This doctoral thesis investigates various capital structure and investment decisions of non-financial firms when (i) banks of the firms become riskier after the Global Financial Crisis (ii) firms operate in countries with heterogeneous financial architecture i.e. bank-oriented and market-oriented countries and (iii) firms face increased macroeconomic uncertainty after the crisis. We also treat Global Financial Crisis of 2007 as an exogenous shock to the supply of capital and investigate the impact of the crisis on different financing and investment decisions of non-financial firms. We examine the cross section of the firms and investigate the differential behaviour of higher growth firms (as measured by Tobin's Q). The central finding of this thesis is that financial architecture is one of the most important determinants of capital structure and investment decisions of non-financial firms. When higher growth firms operating in market-oriented countries face an increase in the market riskiness of banks after the crisis, these firms do not suffer a decrease in overall leverage and the level of investment. These higher growth firms in market-oriented countries also have lower cost of debt and higher intensive and extensive margins of bond financing. Finally, the probability of bank loans and equity (bonds) issuance decrease (increase), after an increase in the downside macroeconomic uncertainty after the crisis. We carefully control firm's demand for credit using various proxies, therefore all our results point towards supply side effect of credit.

In this thesis, I argue that the financial authorities in the United Kingdom and Germany have experienced a waning in their ability to influence the quantity and allocation of (domestic) credit money, and its domestic and international value i.e. purchasing power, since WW2. This ability is called financial power. It is then argued that post-Keynesian (PK) endogenous money theory (EMT) can be combined with Marxian analysis in order to give insight into the changing financial power relationships between state, finance sector and real economy from 1945 to 2007. In particular, the ability to influence the provision of credit is identified as a primary (but not exclusive) source of social power for those that wield it. Inspired by the work of Susan Strange1, the thesis defends the position that this financial power is derived from the ability to influence the quantity of money issued (and its allocation) and its purchasing power, which are determined by the state and market in varying proportions depending on context (Strange 1988).2 Since virtually all of modern money exists in the form of credit-money held as bank deposits, it is further posited that the focus on the political economy of the banking system is appropriate. It is argued that the state in capitalist economies exercised certain capabilities to influence credit during the Bretton Woods period (1944-1973) but that, as the thesis title suggests, was subsequently eroded. The thesis establishes empirical support for this proposition, and then provides an explanation of the phenomenon using Marx’s political economy combined with the EMT. If the state has lost financial capability, this reduces its capacity to regulate the economy and increases any democratic deficit. The growth of financial markets in recent decades (so-called financialisation) has led many such as Palley to suggest that finance sector decision-makers increasingly determine economic outcomes (Palley 2007). It is also common to explain these monetary developments with reference to the actual nature and processes of financialisation itself. Inspired by the seminal work of Andrew Kliman, it is argued that this approach provides insufficient explanation of the root causes of financialisation (1999)3. In contrast, the thesis argues that systemic drivers of capitalism rooted in production, probably best 1 The late Susan Strange was Professor of International Political Economy at Warwick University. Her theories of financial power are espoused in her States and Markets text (Strange 1988). 2 The control of existing money is also a source of financial (social) power but is not the subject of the enquiry. 3 Andrew Kliman is Emeritus Professor of Economics at Pace University, New York City, United States. understood by Marx, provide plausible explanation of the causes of financialisation and the erosion of state financial capability. The thesis first introduces the key concepts and argument and then provides a review of monetary history, monetary theory (including the EMT), Marx’s political economy and an exploration of the role of the state. The objective was to arrive at a robust modern theory of money that could be synthesised with Marx. The study of financial power then examines two research questions, within the context of case studies (from WW2 to 2007) of the United Kingdom (UK) and German financial systems (Federal Republic of West Germany [FRWG] before 1990). The first explores whether or not the capabilities of the UK and German states to determine the level of domestic credit (i.e. offshore currency is ignored), inflation (thus domestic purchasing power) and exchange rate value (international purchasing power) has been diminished. The second question considers the systemic development with respect to the changing roles and interaction between the state, private banks and non-financial businesses in the context of the growth of financial markets. The question asks whether underlying production factors, in particular Marx’s law of value, provide a plausible explanation of the erosion of state financial capability. It is concluded that this is a valid conclusion supported by theory and evidence. The interpretation of Marx that is employed is called the Temporal Single System Interpretation (TSSI) of Marx, which illustrates Marx’s law of value across periods and identifies a tendency for profit rates to fall. In particular, the method used by Kliman in his study of US corporate profitability from the 1930s is used in the German and UK case studies (Kliman 2010). The results indicate that profitability has fallen across the period, especially if Marx’s method of adjusting for inflation is adopted. The thesis then claims that the tendency for the profit rate (measured in abstract labour terms) to fall was a key underlying (albeit indirect) driver of the systemic propensity towards financialisation phenomena. I claim in the thesis that the responses of market financial agents (supported by the state) to the falling profitability have also been responsible for the erosion of state capability to influence the level of credit and the purchasing power of money, since a key feature of the financialisation era manifests a stronger role for market actors at the expense of the UK/German state. Fundamentally, these conclusions support the Marxian-inspired notion of the state as an entity that primarily exists to represent the interests of capital and capital accumulation.

This thesis explores UK payday loan consumers' lived experience of managing money, to better understand financial decisions made by indebted individuals. Payday loans offer a high cost, short-term credit solution to individuals without a savings safety net. Recent legislation has improved lender behaviour, and reduced the size of market. However, the number of complaints logged by payday loan users remains high. Scant research regarding payday loan users is available; that which exists tends to be commissioned by lenders or consumer protection groups, or US-based. The theoretical domain of this research is consumer decision-making (CD-M). CD-M is theorised within the field of consumer behaviour. However, this field tends towards an economic and rational underpinning, which often fails to take context and emotive state into account. This research aims to give voice to real life payday loan users, and consider the wider context of emotions in CD-M. Existential-phenomenological interviews and participant-generated Post-it® models were used to explore the lived experience of payday loan consumers. The data was analysed using a customised, innovative method that draws upon an existential-phenomenological analysis, thematic analysis, and voice-centred relational method. An original model of movement around credit sources was created, identifying several orbits on which groups of credit products exist. Reasons for movement between the orbits are also explored, with a chapter that explores borrowing at Christmas. The findings address several issues within the literature, in particular where traditional CD-M theory does not adequately explain the decisions made by payday loan consumers. This is important for lenders and policymakers to better understand the financial decisions of consumers, with implications for future payday loan policy, business strategy and communications.