Thesis (Ph.D.)--University of Illinois at Urbana-Champaign, 2006. / Source: Dissertation Abstracts International, Volume: 67-11, Section: A, page: 4287. Adviser: Anil K. Bera. Includes bibliographical references (leaves 56-58) Available on microfilm from Pro Quest Information and Learning.

Thesis (Ph.D.)--Indiana University, Kelley School of Business, 2006. / "Title from dissertation home page (viewed July 5, 2007)." Source: Dissertation Abstracts International, Volume: 67-08, Section: A, page: 3101. Adviser: Utpal Bhattacharya.

Thesis (Ph.D.)--University of Illinois at Urbana-Champaign, 2006. / Source: Dissertation Abstracts International, Volume: 67-07, Section: A, page: 2687. Adviser: Michael S. Weisbach. Includes bibliographical references (leaves 158-164) Available on microfilm from Pro Quest Information and Learning.

Thesis (Ph.D.)--University of Illinois at Urbana-Champaign, 2008. / Source: Dissertation Abstracts International, Volume: 69-05, Section: A, page: 1914. Adviser: Neil D. Pearson. Includes bibliographical references (leaves 92-99) Available on microfilm from Pro Quest Information and Learning.

abstract: One necessary condition for the two-pass risk premium estimator to be consistent and asymptotically normal is that the rank of the beta matrix in a proposed linear asset pricing model is full column. I first investigate the asymptotic properties of the risk premium estimators and the related t-test and Wald test statistics when the full rank condition fails. I show that the beta risk of useless factors or multiple proxy factors for a true factor are priced more often than they should be at the nominal size in the asset pricing models omitting some true factors. While under the null hypothesis that the risk premiums of the true factors are equal to zero, the beta risk of the true factors are priced less often than the nominal size. The simulation results are consistent with the theoretical findings. Hence, the factor selection in a proposed factor model should not be made solely based on their estimated risk premiums. In response to this problem, I propose an alternative estimation of the underlying factor structure. Specifically, I propose to use the linear combination of factors weighted by the eigenvectors of the inner product of estimated beta matrix. I further propose a new method to estimate the rank of the beta matrix in a factor model. For this method, the idiosyncratic components of asset returns are allowed to be correlated both over different cross-sectional units and over different time periods. The estimator I propose is easy to use because it is computed with the eigenvalues of the inner product of an estimated beta matrix. Simulation results show that the proposed method works well even in small samples. The analysis of US individual stock returns suggests that there are six common risk factors in US individual stock returns among the thirteen factor candidates used. The analysis of portfolio returns reveals that the estimated number of common factors changes depending on how the portfolios are constructed. The number of risk sources found from the analysis of portfolio returns is generally smaller than the number found in individual stock returns. / Dissertation/Thesis / Ph.D. Economics 2011

<p> Quantal Response Statistical Equilibrium (QRSE) models the joint probability distribution of asset returns and entropy constrained buy/sell decisions of investors and in doing so offers a behavioral foundation for many of the stylized facts we commonly observe in the distributions of asset returns and economic data such as fat-tails, excess peakedness, and skew. In a QRSE market model, investors condition the <i>distribution</i> of probabilistic buy/sell decisions on the extent to which investments offer above or below average returns. By modeling both returns and actions as probabilistic, QRSE is able to explain the marginal distributions of asset returns as the result of two opposing forces: 1) informational shocks that act as an underlying &ldquo;natural&rdquo; source of dispersion; 2) the tendency of investors to buy low/sell high that causes a mean-reversion dynamic, which decreases the entropy of the returns distribution we actually observe. </p><p> In this thesis, I introduce three new QRSE distributions each derived using the Maximum Entropy Principle. The first is a simple three parameter symmetric QRSE distribution that can fit and, therefore, provide a behavioral foundation for many commonly observed distributions including the Laplace, Gaussian, Logistic, and Student's T distributions. I then introduce a generalized maxent QRSE framework for expanding the assumptions of the basic model. I use this framework to derive two additional QRSE models that allow for skew: one that assumes skew is an implicit characteristic of the underlying data generating process and one that assumes that skew is due to asymmetric buy/sell preferences of investors. I also include two empirical applications. First, I apply QRSE to cross-sectional US equity returns. Second, I apply QRSE to 10 year US Treasury yields in a multiple equilibrium setting using a QRSE hidden Markov model.</p><p>

<p> Foreign currency sovereign bond spreads tend to be higher than historical sovereign credit losses, and cross-country spread correlations are larger than their macro-economic counterparts. Foreign currency sovereign debt exhibits positive and time-varying risk premia, and standard linear asset pricing models using US-based factors cannot be rejected. The term structure of sovereign credit spreads is upward sloping, and inverts when either (a) the country's fundamentals are bad or (b) measures of US equity or credit market stress are high. I develop a quantitative and tractable continuous-time model of endogenous sovereign default in order to account for these stylized facts. My framework leads to semi-closed form expressions for certain key macro-economic and asset pricing moments of interest, helping disentangle which of the model features influences credit spreads, expected returns and cross-country correlations. Standard pricing kernels used to explain properties of US equity returns can be nested into my quantitative framework in order to test the hypothesis that US-based bond investors are marginal in sovereign debt markets. I show how to leverage my model to study the early 1980's Latin American debt crisis, during which high short term US interest rates and floating rate dollar-denominated debt led to a wave of sovereign defaults.</p><p>

<p> Classical asset pricing theory hinges on a few implicit assumptions. First, there're no feedbacks from derivatives to underlying assets. Second, interest rate variations can be endogenized by structural US fundamental shocks. Third, informational heterogeneity plays little role in driving hedging demand and risk premium. However, I show that these assumptions are rejected empirically due to financial frictions in reality. This dissertation bridges the gap by building modern asset pricing theory with frictions to reconcile the empirical challenges. </p><p> Chapter 1 examines derivatives' feedback frictions via the dealer hedging channel. Does the increasingly popular passive investment via Exchange Traded Products (ETF/ETNs) affect underliers? Yes, at least for the most liquid ETP sector: VIX ETPs. The first chapter exploits rich instruments on VIX as a perfect laboratory to test both level and roll effects of ETP demand on underlying futures. Given reduced-form evidence of dealers' ETP-hedging feedback channel, I construct a structural model with preferred-habitat demands to endogenize VIX futures' &ldquo;carry&rdquo;. My estimates indicate that the tail wags the dog. </p><p> Chapter 2 (with Hao Chang) reveals the information contents of treasury term premium and emphasizes demand-based frictions from foreign flows in driving US Treasury yields. We find that foreign carry trades and cross-border investments have been the main economic drivers of long-term interest rates in recent years due to monetary divergence. These evidences pose challenges to conventional structural models using US-exclusive macro variables to explain treasury dynamics. We show superior out-of-sample performance of our extended model with foreign demand. The 2016 negative treasury term premium was mainly crushed by foreign flows reaching for yield. </p><p> Chapter 3 studies informational frictions in commodity markets. I develop a continuous-time general equilibrium model that highlights asymmetric information and dynamic risk-sharing, in order to understand why hedgers trade so much. Each commodity producer exploits firm-specific informational advantage over financial traders on the long side to learn about the fundamental heterogeneously through Bayesian updates, and strategically shorts commodity futures for risk-sharing. Information asymmetry between two sectors becomes severe when the fundamental deteriorates, which amplifies endogenous risk. Regulatory policies like countercyclical margin requirements are beneficial when confronting frictions.</p><p>

Asset managers may be a source of systemic risk due to their risk-taking strategies and vulnerability to dramatic outflows. Investor withdrawals trigger asset sales and redemption costs that only impact remaining investors in the fund. Liquidation lag and mark-to-market lag translate these redemption costs into run incentives. This paper first tests for run-like behavior in corporate bond mutual funds and then tests for the underlying run incentive, measured by the NAV impact. I find that illiquid bond funds are significantly more sensitive to past performance than liquid funds and experience up to 43.6% more outflows given a 1% decrease in returns. Furthermore, net flows into bond funds held primarily by institutional investors are less sensitive to performance but more sensitive to illiquidity than flows into funds held by retail investors, suggesting that institutional bond funds may be more vulnerable to runs. Finally, using a novel dataset, I proxy for the illiquidity of a fund’s underlying bonds and quantify the run incentive. Given 10% net outflows, funds that have insufficient cash and hold bonds of illiquidity 3-5 deviations from the mean experience a significant decrease in NAV of about 34-49 basis points. This paper contributes to the mutual fund and runs literature by offering new empirical evidence of run behavior and run incentives in corporate bond funds. / Applied Mathematics

This paper explores the role that ETFs and options have on the underlying stock return. Using a dataset of 400 stocks over a five year period, I examine the effect that ETF rebalancing and option hedging have on stock returns. I find evidence that rebalancing demands for ETFs increase the volatility of the end-of-day returns of the constituent stocks. In addition, I conclude that options have a meaningful positive impact on the underlying stock's daily momentum. These results suggest that stock returns are destabilized by these two financial instruments. / Applied Mathematics