This dissertation consists of three papers on finite sample properties of the maximum likelihood (ML) estimator of parameters in continuous time dynamic models. In the first chapter, we obtain analytical expressions to approximate the bias and variance of the ML estimator in a univariate model with a known mean. We analyze two cases, when the variable of interest is a stock and when it is a flow. We also study the effect of the initial condition by considering both a fixed and a random initial value. A Monte Carlo study suggests that the performance of the formulae is reasonably good. Analytical bias expressions are then used in the second chapter to compute bias corrected estimators. This chapter also explores other methods for bias reduction that have been employed in the literature, these being the bootstrap, jackknife, and indirect inference. A Monte Carlo experiment shows that all approaches deliver substantial bias reductions. We also explore the robustness of the results to model misspecifications, and provide an empirical application to the broad effective exchange rate series for euro area. The third chapter derives the exact discrete representation corresponding to a cointegrated system of mixed first- and second-order stochastic differential equations with mixed sampling and observable stochastic trends. We also provide some formulae to implement the Gaussian estimation and conduct a Monte Carlo experiment to examine the finite sample properties of the Gaussian estimator. Monte Carlo simulations suggest that the bias and variance of the estimators of the short-run, long-run and adjustment coefficients as well as the variance of the intercepts are mainly determined by the data span, while the bias and variance of the covariance coefficients seem to depend on the sample size.

This thesis traces the history of heterogeneous agent computational economics, and then presents original research in three different strands of heterogeneous agent economics. This includes disequilibrium dynamics, wage posting theory, and heterogeneous agent dynamic stochastic general equilibrium.

We apply a general-to-specific modelling approach to estimate a six-dimensional parsimonious structural vector error-correction model of the US economy. We use graph theory methods to determine the instantaneous causal structure of the system from the data thus, overcoming the common problem of making ad-hoc assumptions about the order of causality. Model reduction procedures allow us to control for the curse-of-dimensionality inhibiting such high-dimensional vector autoregressive systems. The corporate-government bond yield risk premium is identified as one of five cointegration relations characterising the economy. Monetary policy reacts to the risk premium and the term structure of interest rates long-run relationships. Monetary policy is also neutral in the long-run, with a contractionary shock to the federal funds rate leading to only a temporary increase in bond yields and fall in inflation and capacity utilisation. In addition, corporate bonds react faster and by more than do Treasuries, making the corporate-government bond yield spread a potential target in implementing monetary policy. Joint modelling of fiscal and monetary policies should elucidate on their interaction. We construct an eight-dimensional parsimonious structural vector equilibrium correction model of the US macroeconomy over the last five decades. The fiscal deficit is found to be one of five cointegration vectors, constraining fiscal policy in the long-run. In contrast, the share of the government sector is found not to be mean reverting. Impulse-response analysis of the parsimonious system facilitates precise measurement of the dynamic Keynesian fiscal multiplier, where we distinguish between deficit-spending and balanced-budget spending shocks (as in the so-called Haavelmo, 1945, theorem). Our estimates of the long-run multiplier are 1.62 for a bond-financed spending shock and 1.77 for a tax-financed spending shock, with both being greater than 1 and significant at a 95% confidence level. Monetary policy is neutral in the long-run except for the level of output on which a permanent effect is observed. Increasing the federal funds rate by a percentage point is followed by falling tax revenues while government spending is largely unchanged, thus inflating the fiscal deficit in the short-run and medium-run. One aspect of increasing inter-dependence between economies can be seen in the internationalisation of financial markets. We investigate the propagation of domestic and foreign shocks through US and UK financial markets for money, bonds, equities, and the exchange rate. We focus on within-market, cross-market, and cross-border linkages. This study is especially relevant for small, open economies which are most exposed to foreign-originated shocks. US markets dominate cross-border spillover effects and explain about 7.5% of the variation in UK asset markets. This is in contrast to the 0.15% of the variation in US financial markets that is explained by shocks from UK markets. The strongest effects are in equity and money markets. Own idiosyncratic shocks have the highest explanatory power and account for 54%-94% of the variation in returns.

In this thesis we bring a series of contributions to the topic of multivariate asset modelling with dependence. In the first part of the thesis (chapters 2, 3 and 4) we look at equity modelling by factor models obtained by multivariate subordination of Lévy basis and discuss multi-asset derivative pricing by Fourier transform methods. More specifically, in the second chapter we propose a construction method for obtaining factor models based on multivariate subordination which extends the results of Barndorff-Nielsen et al. (2001). A lemma describing the characteristic function for the entire class of models is provided which opens the gates for multi-asset derivative pricing by Fourier transform methods under this class of models. Classification, parametrisation and the dependence structure details for the models in this class are then discussed in the second part of the chapter. The chapters 3 and 4 propose each a different three-factor model for the evolution of equity returns and provide the details of martingale asset pricing, calibration and multi-asset derivative pricing methods under the specific model. The specific applications that are treated are the spread options, in chapter 3 and CVA evaluation for forward contracts, in chapter 4. In the second part of the thesis (chapter 5) we look at the multi-name credit modelling in the context of factor models built by time-changes. Specifically, we propose a factor extension of the univariate default model proposed in Packham et al. (2013)and then we discuss the calibration and the pricing methodology (including details of their implementation) for single-name and multi-name credit derivatives contracts. The specific applications that are treated are the pricing and calibration on Credit Default Swaps, Credit Index Default Swaps and Index Tranches (synthetic CDOs).

Farm input subsidies are assumed to improve agricultural production and productivity for small resource poor farmers in developing countries by promoting the use of improved farm inputs, mainly inorganic fertilizers and hybrid seeds. This is expected to contribute to increased income from produce sales, improved food security at household and national levels, and consequently, contributing to poverty alleviation. Limited existing empirical evidence on the impact of farm input subsidies on food marketing, household welfare and migration suggests marginal effects. This thesis contributes to the existing literature by analysing the impact of farm input subsidies on farm households' maize market participation, welfare and migration by using the most recent nationally representative integrated household panel survey data for Malawi of 2010 and 2013. This thesis uses the quantity of subsidised fertilizer the household redeemed to measure the impact of farm input subsidies. Different indicators and empirical models from the ones used in the existing literature on food marketing, household welfare and migration effects of farm input subsidies are used to explore more empirical evidence. The main findings are that farm input subsidies increase farm households' market participation and food security; and reduces household members' migration. The results on market participation indicate that subsidised fertilizer increases both farmers' maize market participation as sellers and quantities they sell. On migration, subsidised fertilizer reduces rural to urban and rural to rural migration of household members. While on household welfare, the results suggest that subsidised fertilizer increases available per capita calories per day, household's months of food secure, and probability of being food secure from own production of cereals and legumes, but has statistically insignificant effects on household annual consumption expenditure.

This thesis consists of three self contained chapters. In the first chapter, we re-assess the problem of general equilibrium models in matching the behaviour of the real exchange rate. We do so by developing a two country general equilibrium model with non-traded goods, home bias, incomplete markets and partial degrees of pass through as well as nominal rigidities both in the goods and labour markets. Our key finding is that presenting an encompassing model structure improves the performance of the model in addressing the persistence of the real exchange rate and its correlation with relative consumption, but this improvement is at the expense of failing to replicate some other characteristics of the data; where the model does a good job at explaining the failure of international risk sharing and generates substantial real exchange rate persistence, it fails to match several other observed business cycle features of the data, such as the volatility of real exchange rate and consumption. In the second chapter of the thesis, we study the importance of the extensive margin of trade for the UK export dynamics. During the great recession, UK exports fell by around 8% with respect to their trend, more than a standard general equilibrium model would predict. In this paper, we ask whether an estimated two country DSGE model with extensive margin of trade can explain this drop and the main business cycle features of the UK economy. The extensive margin improves the overall performance of the model, but cannot improve substantially on replicating the behaviour of exports. Much of the trade collapse during the great recession can be explained by a shock to export entry costs associated with tighter financial conditions. Understanding the trade balance dynamics has a central role in studies of emerging market business cycles. In the last chapter, we investigate the driving sources of emerging market trade balance fluctuations by developing a two country, two sector international real business cycle model with investment and consumption goods sectors. We estimate the model for Mexico and US data and find that a slowly diffusing permanent investment specific technology shock that originates in the US accounts for most of the trade balance variability in Mexico. This shock is also the key driver of business cycle fluctuations in Mexico.

Credit has proven to be a necessary tool for economic development affecting positively the welfare of households and individuals. However, one major area in which rural households lack is access to financial markets including credit. The studies included in this thesis contribute to the access to credit literature and the credit constraint/unconstraint impact on some welfare outcomes. The first empirical study examined farm households' access to credit in rural Malawi. Unlike previous empirical studies, particular attention is given to discouraged borrowers who are mostly ignored in such studies. Using the 2010/2011 household survey data from Malawi the study determines the demographic and socio-economic characteristics that distinguish farm households who need credit, who are the discouraged borrowers and who are rejected applicants. A three-step sequential estimation model following a trivariate probit model with double sample selection was adopted. The findings revealed that there were over 7 times more discouraged borrowers than denied applicants. Women were more likely to be discouraged from applying for credit but, if they applied, they were more likely to be successful in obtaining credit than males. This shows that when examining farm households' access to credit discouraged borrowers should be given special consideration. Capturing discouraged borrowers as also credit constrained, the second empirical study employed a switching model to estimate the impact of credit constraint status on farm productivity for each credit constraint regime. The study further compared the expected production under actual and counterfactual conditions for a household being credit constrained or unconstrained. The findings suggest that a household that is constrained is less productive than a randomly selected household from the sample would but that for the unconstrained household is inconclusive, however, the counterfactual arguments as seen from the analysis shows that being credit unconstrained was beneficial to the increase in productivity. Studies have shown that undeveloped financial markets have been a major contributing factor increasing inequality, especially in developing countries. The third empirical study examined the impact of household credit constraint on the consumption inequality of rural households in Malawi. Factors that explain the within and between credit constrained and unconstrained status of consumption inequality were examined. The General Entropy (GE) Index and the Regression-Based Inequality Decomposition Methods, Field's (2003) and Blinder-Oaxaca Decomposition were employed. The findings show that inequality was more prominent within the groups than between them. Also, the size of households and the value of assets were the major contributors to the within-group inequalities for credit constrained and unconstrained households. Further, only the endowment component was important in explaining the consumption inequality gap between the credit constrained and unconstrained households. Adjusting the level of endowments of constrained households to that of the unconstrained households increased their welfare by 15.7 percent.

In 1997 the Saudi Government took a forward step to implement privatisation and to promote the process and its implementation in different public enterprises. They issued various resolutions and decisions for implementing and managing the programme but the process is moving slowly and rate of the implementation is limited. Implementation of privatisation is related to several matters, such as condition of the enterprise, content of the privatisation strategy, etc. This research concentrates on investigation and analysis of the privatisation programme in Saudi Arabia, with particular reference to the process of managing and implementing the programme. The main objectives of the study are: (1) to establish the reasons for the delay in implementing; (2) to investigate the barriers hindering the process in several enterprises and the level at which these barriers are hindering the programme; (3) to develop an "Efficient Models" to help the Government in smooth implementation of the programme. The research uses the literature review, survey opinions of a group of the public and private sector managers and various case studies as sources of data for the research. The methodology of the study evaluates whether the barriers to implement the programme in the country lie at the privatisation strategy level or at the enterprise level. It includes investigation of the barriers hindering of the programme, development of a main model and the other models based on analysis of the international experiences and their comparison with the actual implementation of the programme at Saudi Arabia. This study is designed to fill the gap in knowledge about planning and managing privatisation and monitoring the process of implementation. The study develops an "Efficient Models" which makes managing the process clear for all the organizations involved in the process. These models are allowing the Saudi government to implement, manage and monitor the privatisation strategy, employees' matters, restructuring and regulation policy.

This work presented in this thesis aims to provide a better understanding of how agents respond to policy incentives to encourage energy efficiency improvements. First of all, the way agents respond to policy incentives crucially depends on heterogeneity in characteristics determining their responsiveness to taxes and subsidies. Second, agents’ heterogeneous responses to policy can undermine the cost-effectiveness of subsidies. Third, under conditions where the policy targeting is poor or agents are not very responsive to the traditional market-based instruments other policy instruments based on information provision or nudges may be more effective. I propose a theoretical model on optimal tax and subsidy combinations to correct externalities from energy consumption and underinvestment in energy efficient technologies. I show that when agents misperceive their true energy efficiency, the targeting efficiency of policies based on subsidies is poor and consumers selection into adoption is adverse. Adverse selection arises because those more likely to adopt consume less energy and overvalue the benefit from adoption. In the second chapter, I present a discussion on energy policies in the United Kingdom and analyse the energy consumption and energy efficiency measures adoption patterns using data for households in England and Wales. This sets the stage for Chapter 3, where I present an empirical study to test whether selection into adoption is adverse or not. I find that early technology adopters consume more energy before adoption and experience higher energy consumption drops upon adoption. Thus, supporting the idea that consumers’ heterogeneity plays a major role to explain the observed adoption patterns. The results suggest that adoption decisions are driven by heterogeneity in preferences rather than heterogeneity in beliefs. Hence, overall selection is not adverse and this suggests the role of misperceptions is dominated by the effect of preferences heterogeneity. This does not preclude, however, that biased beliefs may have a role at determining the adoption patterns and responses to policy interventions.

In Chapter 1, a theory of optimal fund size in venture capital is developed. Fund managers - the VCs - add value to the projects they finance, but their human capital is scarce. A matching model is proposed where VCs span their nurturing activity over more projects, and entrepreneurs, who own the projects, direct their search to VCs based on their projects’ quality. The work provides necessary and sufficient conditions for positive and negative assortative matching over VC attention and project quality to emerge and shows when VCs fundraising decision is distorted by selection considerations. The chapter ends with an investigation of the effects of entry of less skilled intermediaries. By attracting the worse entrepreneurs, these new agents alleviate the adverse selection problem associated to managing a larger fund. This offers a new angle to think about policies encouraging entry in the venture capital industry. In Chapter 2, the model developed in Chapter 1 is extended to a dynamic setting, where projects need time to develop and produce returns. VCs can choose to enter in a short-term contract with investors, giving them access to investors liquidity for a given period of time, and an open credit relationship that allows them to raise investors money at any point in time. The model illustrates a novel advantage of closed, finite-horizon funds, which emerge in equilibrium even when they are socially undesirable: they attract the best entrepreneurs, who value the most the exclusive relationship that only a closed-end fund can guarantee. The interpretation is that VCs benefit from committing to a size in the first place. In Chapter 3, the focus moves to the study of the distortions in fund managers’ behavior that may occur within a fund’s life. A setting is introduced where information about a manager’s ability is imperfect and managers are interested in their reputation. Given the application to investments in young firms, managers in the model are agents that create value because they can experiment and learn about a projects potential. Their incentive to take on risk is distorted by career concerns, and can result in under or over risk-taking. The result contrasts with Holmstrom (1999) where managers directly affect the project’s success rate, and career concerns can only produce inefficiently low risk-taking. It is shown that the inefficiency is reduced when the market can also observe the outcome of projects with the same fundamental.