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.

This thesis presents three studies related to the effects of liquidity on financial markets. The first topic explores the relationship between funding liquidity and credit default swap (CDS) spreads. Using panel estimations, this study provides evidence that a tightening of funding liquidity increases spreads, effect which is three times larger in magnitude for high-CDS entities compared to low-CDS firms. Moreover, this paper highlights the impact of the 'CDS Small Bang' regulatory changes, especially the introduction of fixed coupons which induced upfront fees for trading CDSs. We find that after the introduction of the fees, funding liquidity changes have a much larger and more significant impact on CDS spread changes. The second study presents an empirical investigation of the theoretical predictions of Brunnermeier and Pedersen (2009) connecting funding liquidity with market liquidity and volatility and an extension of these linkages to CDS spreads. Specifically, in a European context, this paper documents that: (i) funding conditions co-move with illiquidity, volatility and CDS spreads, (ii) during tight funding conditions, illiquid, volatile and high-CDS spread securities become particularly illiquid, (iii) a tightening of funding liquidity increases CDS spreads, this effect being stronger if funding conditions were already constrained, (iv) a deterioration of funding liquidity decreases contemporaneous returns , and (v) funding shocks are priced in the cross-section of illiquidity-sorted portfolios The third study examines the relationship between monetary policy and stock liquidity, in the context of the U.K. market. In line with the inventory paradigm of market microstructure and theories linking capital constraints with market illiquidity, this study documents that a con tractionary (expansionary) monetary policy reduces (increases) stock liquidity. Moreover, this study finds that the effect of monetary policy on stock liquidity depends on the liquidity proxies chosen, decreases with firm size , increases with firm volatility, and is stronger during the 2007-2009 financial crisis.

Academic and professional attention towards ethics in business in general and audit ethics in particular has grown significantly following well-documented audit failures and corporate scandals. Several empirical studies have been carried out to investigate the factors underlying such auditors’ ethics. The majority has been done in the USA and other developed countries, often using undergraduate student convenience samples. They have provided clearly mixed results and have tended to focus on only one or two stages of the ethical decision making (EDM) model devised by Rest (1986). This study sought to build and improve on the previous research by investigating the impact of a broad set of personal, organisational, and issue-specific variables on three stages of external auditors’ EDM process. Moreover, it did so in a developing country, namely Egypt, which is the largest country by population in the MENA (Middle East and North Africa) region. This study hypothesised that personal variables (gender, age, educational level, position level, work experience, certification status, professional commitment, and personal moral philosophy), organisational variables (code of ethics, firms size, ethical climate types), and moral intensity dimensions are significantly related to the different stages of external auditors’ EDM process. Using a relatively large sample, data was collected via a questionnaire which include four context-based external audit ethics scenarios. An adapted Arabic version of the questionnaire translated using translation-back translation technique was administered to Egyptian participants and usable responses were received from 393 external auditors working for 19 international audit firms in Egypt. For each scenario, the EDM process was examined in terms of the recognition, judgment and intention stages of Rest’s model. While moral intensity was originally conceptualised as a six-dimensional construct, factor analysis revealed only two dimensions, which were named ‘perceived social pressure’ and ‘actual harm’. Results show that these two dimensions, particularly social pressure, are the strongest predictors of auditors’ three stages of EDM. Ethical climate types and personal moral philosophy also showed some significant results. Significant and positive results were also found regarding firm size, work experience, position level, and certification status. However, findings revealed that age, educational level, code of ethics, and professional commitment have very limited impact on auditors’ EDM stages. Interestingly, when gender differences were found, male auditors exhibited more ethical choices than females. Findings reinforces the need to give more attention to auditors’ socialisation and training, as well as the importance of continuing professional education to enhance auditors’ EDM abilities. Egyptian audit firms should also pay more attention to their organisational ethical infrastructure and maintain an organisational consensus regarding unethical acts. Using alternative methodologies and inclusion of the ethical behaviour stage in future studies, may aid future research in complementing these results, thus provide an enhanced understanding of auditors’ ethical decisions. At the very least, future studies should study all the first three stages, as in this research, rather than focusing on only one or two stages. Additionally, cross-cultural audit ethics studies represent a fruitful avenue for future research. The questionnaire used in this study could be used, with minimal adaptations, in other countries.

This thesis critically analyses the deficits-inflation nexus and inflation targeting in lower-income countries. Previous research has found a significant relationship between fiscal deficits and inflation in low-income countries, but not in high-income countries. It is shown here that the crucial factor is the quality of institutions. The relationship holds in countries with weak institutions, but not in those with strong institutions, even if their per capita GDP is quite low. The implication is that institutional improvements can enhance macroeconomic outcomes in poor countries. The robustness of the findings is tested using various measures of institutional quality. On the other hand, we provide new insights on inflation targeting (IT) in low-income countries. Previous research on inflation targeting has focused on high-income and emerging market economies since low-income countries (LICs) were slow to adopt the framework. Only recently has enough data accumulated for the performance of IT in LICs to be assessed. We show that unlike in emerging markets, in LICs IT is not been effective in reducing inflation. Weak institutions, a typical feature in LICs, do help explain this especially when we examine their role under floating exchange rate regimes. Finally, we characterise monetary policy in Ghana, one of the earliest low-income countries to adopt an IT framework, but where IT has not been very successful in reducing the levels and volatility of inflation within a modified Taylor rule. We investigate whether poor conduct of monetary policy is responsible for the poor performance of IT and find that is not. Monetary policy reaction functions are similar to those estimated for countries with successful monetary policies, and interest rates respond in the theoretically recommended way to inflation shocks.