The first chapter of the dissertation describes the two competing explanations that have been offered attempting to explain the puzzle. The proponents of the Efficient Market Hypothesis, argue that such apparent mispricing results from rational pricing in an efficient market where some frictions may be present, while critics of this hypothesis argue that such phenomenon is the result of noise traders in the market for CEF shares and rational traders in the market for the underlying stocks that comprise the Net Asset Value of the CEF (the Investor Sentiment Hypothesis). The second chapter examines the behavior of closed-end country funds and investment trusts discount/premiums following the Asian financial crisis of 1997–98. More specifically, we document and analyze the puzzling large premiums developed by country funds dedicated to Asian and other emerging stock markets after the crises erupted. We also determine that none of the existing hypothesis that attempt to explain the closed-end fund discount puzzle can account for the emergence and time-series behavior of such large premiums, and propose a new explanation which assumes that money and capital markets are partially segmented. We perform a number of time series techniques such as cointegration tests and error correction models to test our hypothesis. The third chapter studies whether increases in implied volatilities on national stock indices, a proxy for increases in risk premia, affect the prices, net asset values (NAVs), and premiums of closed-end country Rinds (CEFs) and investment trusts (ITs). We conclude that changes in implied volatilities on the S&P 500 (FTSE-100) are generally not significant explaining either country fund (investment trust) prices or country fund (investment trust) NAVs, whereas changes in domestic implied volatilities affect a large number of country fund prices and NAVs, but are generally not significant in the case of investment trusts.

This dissertation is comprised of four related essays on capital markets. The essays are based on the application of pricing kernels to build mathematical models and financial econometric estimation for asset pricing, derivative pricing, and asset allocation. In the first essay, we propose a new way of modeling and estimating pricing kernels. Our model is a multi-factor version, which includes stochastic volatility and the central tendency of a state variable. It shows that equity prices contain information about bond prices. We prove that in the bond price valuation process, there is no information involved for the equity prices, but equity price valuation does include bond prices as a state variable. The second essay studies the behavior of market price of risk (MPR) from interest rate process and apply the estimated MPR for derivatives pricing. In this essay, we empirically study the behavior of MPR using the volatility of long term bonds' return under a certain limiting probability condition. We test the proposed method with the CIR single factor model. Empirical work is also extended to compare theoretical model prices of zero-coupon bonds and derivatives with the estimated MPR. In the third essay, we investigate the behavior of the MPR estimated from the market data and simulated data. The new proposed model of the MPR is based on the volatility structure of long term bond returns. We simulate the term structure of volatility for the very long-term bonds and compare the results with the available market data. Furthermore, we find that the short-term interest rates and its volatility affect positively on the changes in the level of MPR. As a factor analysis, the volatility of the short-term interest rates influence more significantly on the MPR than the short-term interest rates do. The fourth essay proposes an optimal growth portfolio model using long-term bonds to find optimum asset allocation strategy. We test the effect of changes in the optimal growth portfolio using risk-less assets and market portfolio and find optimal asset allocation strategy. We test the performance of the long-term bonds as a proxy for the optimal growth portfolio.

This dissertation examines the relationship between the presence of international investors and firm success. The first chapter of my dissertation examines the relationship between international venture capital investors and private firm success spanning 81 countries over the years 1995-2010. The data examined indicate that, relative to deals in which the investor base is purely domestic, private firms that have an international investor base have a higher probability of exiting via an initial public offering (IPO) and higher IPO proceeds. The evidence is consistent with the view that while the benefits of internationalization may be difficult and costly to manage, for those firms that succeed in managing cross-border coordination costs, there is potential value for an IPO firm. The benefits relative to the costs of internationalizing the investor base for private firms sold in acquisitions, by contrast, are much less pronounced. The second chapter of my dissertation analyzes a firm's decision to issue new equity internationally. Though over eight percent of firms conducting an IPO between 1995 and 2010 choose to conduct foreign IPO, in which the firm issues only abroad, this form of IPO fails to raise significantly more proceeds net of costs than matched IPOs with similar firm characteristics. On the median, foreign IPO firms forego proceeds equal to $ 1.58 million, approximately 4.7% of the value of their total assets or 5% of their total net IPO proceeds. As firms select whether they will issue equity at home, abroad, or both, this result is surprising. We are unable to explain the difference in proceeds using any indirect costs or benefits of international issuances discussed in the literature or several additional hypotheses we propose - that firms may be attempting to take advantage of hotter IPO markets, lower indirect costs, a better legal environment, or the ability to issue subsequent SEOs. As we are unable to explain the difference in proceeds, this constitutes the Foreign IPO Puzzle. / A Dissertation submitted to the Department of Finance in partial fulfillment of the requirements for the degree of Doctor of Philosophy. / Summer Semester 2015. / June 5, 2015. / Includes bibliographical references. / April M. Knill, Professor Directing Dissertation; Thomas Zuehlke, University Representative; Yingmei Cheng, Committee Member; Irena Hutton, Committee Member.

This thesis studies the anticipative information dissemination under different market and information structures. The first model studies a multiasset continuous time economy with heterogeneous information and a derivative market. The derivative has a general payoff written on an underlying stock paying a future dividend distributed as a weighted sum of noncentral chi-squares. The economy is populated by informed and uninformed investors as well as investors trading on noise. The noisy rational expectations equilibrium is derived in explicit form. The equilibrium stock price is positive at all times and has a stochastic volatility which is affine in the fundamentals and the endogenous information signals. The derivative cannot be replicated, except at rare endogenous stopping times when the market becomes incomplete. Properties of equilibrium, such as informational efficiency and its relation to dynamic completeness, volatility structure and asset holdings behavior are examined. The behavior of asset holdings in periods surrounding times of market incompleteness is studied. The model predicts an increase in trading activity, stock holdings and derivatives open interest on expiration dates. The second model studies a market with multiple periods and multiple private information signals. There are two groups of informed investors: informed and super-informed. The difference between them is that the super-informed receives additional noised private information in the second period. In the first period, the informed and super-informed receive the same noisy signal and have the same trading strategy, while the uninformed would infer one noisy signal from equilibrium prices and quantities. In the second period, the super-informed investor receives a second private signal that is more precise than the first one. The market infers the combination of two noisy signals, and with the knowledge of the first noisy signal, infers the second as well.

This dissertation studies hedge funds' characteristics, performance and risk, as well as their managerial incentives. In essay one, we find that similar to non-financial industries, there is a balanced allocation to business risk and financing risk in hedge funds. Empirically we find stylized pattern in the leverage ratio hedge fund managers use. Namely, the managers with higher strategy riskiness tend to use lower leverage and vice versa. What is more, this relationship is weaker for the "really dead" funds. We construct an empirical measure for leverage ratio to detect actual leverage usage for hedge funds. With a manually constructed and identified sample containing live and "really dead" funds, we are able to examine how leverage usage affect fund survival probability using a standard probit model. The second essay studies the timing ability of the famous trend followers in hedge funds---the CTAs. In contrast to mutual funds and hedge funds, CTAs trade a limited number of futures contracts and option. This feature enables a clean test for market timing ability in this group of managers. We propose new factors for popular market timing models to overcome the difficulty that traditional models provide poor explanatory power for CTA returns. With a multi-market version of both Trenor and Mazuy (1966), Henriksson and Merton (1981) models, we confirm that CTAs have both return and volatility timing ability in multiple markets. We are also able to identify the markets in which different categories of CTAs have timing ability. We explore the managerial incentives and risk-taking behavior for hedge funds and funds of funds in essay three. We find evidence that hedge funds shift their risk-taking in response to the high-water mark and to relative performance. Our findings disclose the underlying managerial incentives due to career concern as well as asymmetric payoff structure. We also compare the managerial incentive of junior vs more seasoned FOF managers in terms of diversification level and risk exposures. We find that consistent with the "herding" and "signaling" literature for mutual funds.

In this dissertation, I explore the performance of risk arbitrage over 1990 to 1999 for three types of mergers: stock swap, cash tender and collar mergers. Furthermore, I construct passive/naïve indices for risk arbitrage strategies and test the indices. In the performance analysis, I found: (i) Risk arbitrage generates lower returns and losses than an unhegded strategy for target stocks but higher returns and losses than the unhedged strategy for acquirer stocks. (ii) Changing exchange ratios may not always negatively affect the returns. (iii) Overall, successful mergers generate superior returns, compared with unsuccessful mergers. (iv) The inclusion of dividend and income on cash balances (derived from the short sales of the acquirer's shares) added moderately to the computed returns. (v) Time weighted annualized returns are different from equal weighted annualized returns. In the passive/naïve indices analyses, I found: (i) Risk arbitrage produces higher risk adjusted returns than unhedged strategies. (ii) In risk arbitrage, the stock swap index shows the highest risk adjusted returns. The highest volatility in cash tender offer positions causes a risk arbitrage strategy to produce the lowest risk adjusted returns. (iii) On average, active indices generate the best risk adjusted returns among indices. (iv) Passive/naive risk arbitrage indices have low and negative betas. These negative systematic risk levels are due to the presence of higher systematic risks for acquirer indices compared with those of target indices. (v) Active indices have low and positive systematic risks. And they have a positive relationship with unhegded strategies. These results imply that the active indices tend to be partially hedged.

This dissertation focuses on option-based risk management from corporate finance and investment perspectives. The first chapter focuses on a corporate finance issue: understanding dynamic hedge ratios of gold mining firms. An understanding of the hedging activities of a firm is critical to developing a thorough picture of risk exposures. In this paper we provide an alternative explanation for the dynamic nature of hedge ratios of mining firms. While the extant hedging literature is voluminous, it often errs by directly or indirectly assuming that Selective Hedging (in which managers base their hedging decisions on their expectations of future prices) is the source of dynamic hedge ratios. In contrast, we argue that the dynamic hedging activities of gold producers may not be indicative of Selective Hedging, but rather a form of hedging driven by the firm’s cost structure whereby the managers attempt to dynamically replicate a protective put position on the value of their future production to ensure a minimum threshold profit margin (similar to Portfolio Insurance). Informational asymmetries relating to the details of the firms cost structure may allow such managers to add value to the firm through their hedging activities. Thus, this model of hedging activity does not suffer from the persistence paradox of the Selective Hedging model. The second essay focuses on option-based risk management from an investment perspective. The majority of the extant literature on option-based risk management focuses on equity investments. This is the first study to examine collar strategies on such a wide range of asset classes (17 exchange traded funds representing currencies, commodities, fixed income, and real estate). By considering the performance of collar strategies on a diverse set of assets, we draw insights into the unique characteristics of each asset class and the implications of these differences for risk management. We find significant differences across asset classes with respect to implied and realized volatility levels, volatility skew, transaction costs, liquidity and the effectiveness of collar strategies. This research provides valuable insight into the implementation of risk management strategies for retail and institutional investors in the rapidly evolving financial markets.

The private sector in Africa is dominated by micro, small, and medium scale enterprises (MSMEs). This sector of the economy often finds it the most difficult to raise financing from the formal financial institutions. This funding problem is further exacerbated by the fact that financial services sector in the economy is very under developed; hence, there is limited sources of debt financing available to entrepreneurs. Private Equity Funding has played a pivotal role in providing capital to this sector and the African continent would benefit from a buoyant Private Equity market. This study, therefore, seeks to examine the determinants of the Private Equity activity in the South African environment, in order to make recommendations to policy makers as to the policies that they should implement in order to increase Private Equity fund raising activity. This study explores the determinants of Private Equity in South Africa from 2002 to 2016. The autoregressive distributed lag (ARDL) bounds approach to co-integration (M. Hashem Pesaran, Shin, & Smith, 2001) is adopted to determine the relationship between economic, financial, and regulatory variables and growth in Private Equity Funds under management. For economic variables, this study looks at exchange rates, interest rates, GDP growth, the inflation rate, and the level of entrepreneurship in the country. Secondly, for financial variables, it looks at stock market development and the development of the financial sector in the country. Lastly, for regulatory variables, it looks at the effect the tax rate, the political environment, and the regulatory environment has on Private Equity activity. The results of the study found no evidence to support a deterministic relationship between the variables macroeconomic environment, financial development, and the regulatory environment with growth in Private Equity Funds under management in the South African context. The findings of this study can be explained by the opportunistic nature of the Private Equity business. This means that investors look for opportunities in markets where they can make substantial returns, and those opportunities are not necessarily informed by the macroeconomic environment of the countries where the opportunities avail themselves.

This paper examines the performance and performance persistence of South African bond mutual funds. To my knowledge, this paper is among the first research papers to focus on South African bond mutual funds. I utilize the Sharpe Ratio, the modified Sharpe ratio, Jensen's alpha and the multi-index models to examine whether peformance is influenced by the performance measure used. In addition, I examine the impact of conditioning information variables on performance by further measuring performance using the conditional single-index and conditional multi-index models. To test for persistence, I use the contigency tables and crosssectional regressions. I find empirical evidence to suggest that South African bond funds are not able to outperform the market. These findings are consistent across the Sharpe ratio, the unconditional single-index alphas and the unconditional multi-index alphas. When I consider the modified and conditional versions of these models, I conclude that the modified Sharpe ratio improves fund performance when compared to the original Sharpe ratio. Additionally, I conclude that incorporating conditional information variables does not offer significant improvements on the results. However, despite the observed underperformance, I note the improvement on alphas when these conditioning variables are considered. In examining performance persistence, I find evidence to suggest that, in the short-term, persistence is not sensitive to the persistence methodology used. However, I observe that persistence is rather sensitive to the performance model used. Over the longer-term, I find evidence to conclude that persistence is greatly sensitive to both the performance model used as well as the methodology used to test such persistence. My results suggest that the South African bond market is efficient and thereby in support of a passive management investment strategy. Nonetheless, my results urge for a need for bond funds to pay special attention to their trading costs in order to maximise returns for their investmens

Kenya has experienced unprecedented levels of growth in terms of mobile phone penetration and technological advancement, which is boosting financial sector development and subsequently spurring on economic growth. A report published by the Communications Authority of Kenya reported mobile phone penetration at 90.4%, with 41 million mobile phone subscribers as at December 2017. On the back of this, Kenya has made great strides in financial inclusion and with an overall score of 86%, received the top award for inclusive financial services from the Brookings Institution's 2017 Financial and Digital Inclusion Project. This was further reinforced by Financial Sector Deepening Kenya's findings that between 2006 and 2016, the number of fully excluded adults fell from 40% of the population to 17% of the population. One of the technological advancements that is helping bridge the financial inclusion gap is M-Shwari, a mobile banking product launched in Kenya in November 2012, through a collaborative effort between Safaricom and Commercial Bank of Africa. M-Shwari is available to M-Pesa customers and allows users to save and borrow from their mobile phones while earning interest on money saved. This study examined the determinants of M-Shwari usage for deposits and accessing loans. The study was conducted in the Kibera slum in Nairobi County in Kenya and used structured questionnaires to collect data over a six-month period (June 2017–December 2017). The target population was 250 000 persons, with an ultimate sample of 146 individuals. The study employed the Ordinary Least Squares regression technique to examine the drivers of financial inclusion, defined as the number of loans and deposits taken over the past six months on the M-Shwari platform, given respondents' gender, age, education, income, employment and number of dependants. Linear regressions were used to analyse the data. The logistic model was also employed to examine the likelihood of depositing with M-Shwari. The analysis reveals that women have a greater likelihood of using the M-Shwari service, which may indicate that mobile-based interventions could help bridge the gender gap in financial inclusion. While it was found that those who are employed have an increased likelihood of utilisation of the deposit M-Shwari feature, the assessment of determinants of M-Shwari deposits indicate that those who are employed are less likely to deposit money in M-Shwari. This may be due to the plethora of options at their disposal that offer superior benefits over and above those offered by M-Shwari. Education was also a significant determinant and the study found that those with higher levels of education were more likely to use the deposit feature of M-Shwari, but less likely to use the loan feature. The implication of this could be that those who were better educated were in a better position to weigh the pros and cons of loans from M-Shwari versus other sources. While an increase in income increased overall use of the M-Shwari service, a number of dependants linked to pressures on income meant that individuals with a higher number of dependants were less likely to deposit money with the M-Shwari service but more likely to borrow from the service to supplement their income.