This thesis looks at the natural gas market to France, Italy and Spain by proposing an econometric model for the consumption of gas in the residential and industrial sectors of these countries and a discreet choice model for the decision making of investment in import infrastructure and partner choice. Results from the above work is integrated in an object oriented model aiming to generate benchmarks on trade flows to France, Italy and Spain. The thesis also looks at the prospects for the LNG market and critically discusses the problematic of security of supply with liberalisation of markets against the background of changes within the Mediterranean market. Primary information and analysis is an initial contribution of the thesis. The thesis also contributes in terms of the results in the consumption modelling, including the effect of weather on residential gas consumption. Also, the discreet choice model shows a clear pattern in decision making pre-gas liberalisation in Europe and shows, numerically, the drive towards diversification of partners. Finally, the object-oriented model shows scenario driven benchmarks for the choices of partners, suggesting, inter-alia, an even supply for France, an over-supply for Italy and an under-supply for Spain.

This thesis extends the dynamic conditional correlation (DCC) model proposed in Engle (2002) to the case of conditional returns supposed to follow an asymmetric multivariate Laplace (AML) distribution as presented in Kotz, Kozubowsky and Podgorski (2003). We prove that maximum likelihood estimator provides optimal estimates of the relevant parameters estimated. We show the applicability of our approach in a comprehensive set of risk management implementations where we compute Value-at-Risk and Expected-Shorfall measures for portfolios composed by a large number of assets.

This thesis examines if leverage can explain stock returns. Due to the overwhelming influence of Modigliani and Miller (1958)'s seminal work on capital structure where they argue that firm value is independent of financing decisions, limited work has been undertaken on leverage as an independent variable or a risk factor in explaining stock returns. On the other hand, theoretical finance has always regarded debt as one of the principle sources of financial risk. An immediate implication of the Modigliani and Miller (1958)'s propositions on equity returns is that they should increase in leverage. This thesis sets out to test the relation between equity returns and stock returns by undertaking a firm level and portfolio level analysis. This thesis comprises four empirical chapters. The first empirical chapter undertakes a firm level analysis. f estimate abnormal returns on leverage portfolios in the time-series for different sectors. I find for most sectors, abnormal returns decline in firm leverage. However, abnormal returns increase as average leverage in a risk class increases. The separation of the average level of external financing in an industry and of that in a particular firm is important. Utilities for which Modigliani and Miller (1958) report their empirical results (i. e. that returns increase in firm leverage) are in fact sectors with high concentrations and firm leverage ratios very close both to one another and to the industry average. In the Utilities risk class, abnormal returns increase in firm leverage. For other sectors, this is not the case and abnormal returns decline in firm leverage and increase in industry leverage. Results are robust with regard to other risk factors. 'This second empirical chapter investigates the effect of a firm's leverage on stock returns based on the explicit valuation model of Modigliani and Miller (1958) testedin the utilities, oil and gas industries. I test the relationship between leverage and stock returns in all risk classes. For utilities, returns increase in leverage. This is consistent with the findings of Modigliani and Miller (1958). For the other risk classes, returns fall in leverage. Results are robust to other risk factors. The third empirical chapter is an empirical study that tests the relationship between leverage and stock returns at the portfolio level. I investigate this relationship by undertaking a portfolio level analysis of leverage and expected returns using the Fama-Macbeth (1973) methodology with modifications. I find that returns increase in leverage which is consistent with the findings of Miller-Modigliani (1958). I also undertake linearity tests. Results are robust to other risk factors. Leverage is an important risk factor which has been ignored in the asset pricing literature. The fourth empirical chapter attempts to broaden the focus of the current asset pricing literature by forming portfolios mimicking the leverage factor. Returns are ranked according to leverage and grouped into two groups of high and low to demonstrate the risk factor of leverage in stocks. I argue that leverage is an important stock-market factor that explains stock returns. I also undertake robustness checks with the Fama-French (1993) factors of size, market-to-book and excess returns on market. My results show that our leverage mimicking portfolio capture the variations in stock returns better relative to the other asset pricing models.

Reconstruction and deregulation in the international power markets has let prices to be determined by the fundamental rules of Supply and Demand, which brought a substitution from Supply Risk pre-regulation, to Price risk, thus increasing the necessity of hedging using derivatives such as futures and options and therefore brought the issue of pricing these derivatives into focus. However the traditional approaches for the pricing of derivatives are not applicable to electricity due to the unique features of the power market such as the fact that electricity is not storable. Under these circumstances, arbitrage across time and space is limited in the electricity market. As a consequence there is a need for a good model that is able to capture the dynamics of the electricity spot prices for the purposes of Derivatives pricing and Risk Management. In this thesis we propose three different spot models for the Scandinavia electricity market; First, we propose a seasonal affine jump diffusion spike model, which can distinguish the behaviour of electricity spot prices between normal periods and periods when spikes occur. Second, we propose a seasonal affine jump diffusion regime-switching spike, which is an extension of the spike model but contains two separate regimes to distinguish between periods of high and low water levels in the reservoirs, reflecting the availability of hydropower in the market. Third, we propose a seasonal affine jump diffusion three-factor spike model which again extends the spike model but allows the equilibrium level to be stochastic in order to capture the long-run dynamics of the market that are uncovered from the shape of the forward term structure. The performance of our models is compared to that of other models proposed in the literature in terms of fitting the observed term structure, as well as by generating simulated price paths which have the same statistical properties as the actual prices observed in the market. In particular, our models perform well in terms of capturing the spikes and explaining their fast mean reversion as well as in terms of reflecting the seasonal volatility observed in the market. Then we use these models and provide semi-closed form solutions for European option prices and investigate whether the shape of the model implied volatility smile is consistent to the one that is anticipated to be observed in the market. Furthermore, we also perform a sensitivity analysis for Asian option prices which are widely used in the market. Finally, we apply a modified Least Squares Monte Carlo algorithm for the pricing of swing options, and investigate the sensitivity of the incremental swing premium to changes of different parameters used to capture the stochastic behaviour of the power spot prices.

Although it remains small compared with advanced economies, in Ghana there is a growing residential stock which constitutes the basis of an emergent real estate investment market. Much of the recently constructed stock is income-producing rented accommodation, and falls in the formal sector of the market - where sale and leasing transactions are systematically documented in the records of the Ghana Land Valuation Board. The research presented in this thesis makes several contributions to knowledge and understanding of residential real estate markets in Ghana. First, and most fundamentally, it demonstrates that it is feasible to construct technically robust indicators of residential market performance from the records held by state agencies, through the construction of hedonic models which suggest processes of price determination are consistent with those found in other countries. Time series produced from these models, running from 1992 to 2007, document for the first time trends in capital values, rental values and investment returns for a substantial part of the Ghanaian residential market. This thesis also explores practical applications of the newly created residential performance indices. The current research examines the differentials in price determination and performance across the main submarkets of the Accra-Tema conurbation, the dynamics of change in market prices over time against economic and financial indicators, and the returns achieved on residential investment compared with Ghanaian equities and Treasury Bills. The results demonstrate that the residential market has seen strong rental and capital appreciation over the past fifteen years, yielding investment returns ahead of the high rate of general inflation. Compared with other Ghanaian asset classes, residential real estate shows both a rate of return and a level of risk which sit between those on fixed income and equities investments, in line with fundamental theory and experience in other countries. As in other countries, residential real estate returns show low correlations with those on equity and fixed income investments, suggesting a strong case for real estate in a multi-asset portfolio. Beyond the Ghanaian market, this thesis suggests the process of constructing residential indices from records held by state land registration and taxation authority may be replicable in other African countries where there are similar systems of land administration and management, provided that the task of data assembly and validation is feasible.

The study of credit derivatives is one of the most popular and controversial issues that concerns the entire financial industry. Increases of defaults and bankruptcies during the recent credit crunch has stipulated a heated debate about the adequacy of the existing pricing and hedging methodologies for credit derivatives portfolios. The main objective of this thesis is to propose and evaluate a treatable framework that addresses many of the deferences of the standard market model for portfolios of credit instruments. After review and product introductions in CHAPTER 1 we first summarize the common simulation methods for pricing portfolio credit derivatives, then we propose an alternative methodology that is based on an economical sense of the models and market observables in CHAPTER 2. Such simulation method provides a testing environment which houses the asset value based models with reliable assumptions. Meanwhile, a PCA analysis on CDO market spreads is performed on market data in CHAPTER 3. In CHAPTER 4, we develop an old school dynamic model for credit derivative valuation, it match the market needs, fit quoted spreads while providing time evolution using historical market observable measure. Finally, combining together the model and simulation framework, we are able to construct hedging strategies based on simulation results in CHAPTER 5. We mainly focus on the utilization of default probabilities in pricing techniques and a close-form formula is provided to calculate probability of default from the proposed growth rate factor.

Delegated portfolio managers, such as hedge funds, mutual funds and pension funds, play a crucial role in financial markets. While it is well-known that their incentives are misaligned with those of their clients, the consequences of this misalignment are understudied. This thesis studies the effects of delegated portfolio managers' incentives in the real economy, in corporate governance and in portfolio allocation. In the first paper, 'Do institutional investors improve capital allocation?', I show that delegated portfolio managers' misalignment of incentives - which I model as their career-concerns - has real and positive economic effects. I find that delegated portfolio managers allocate capital more efficiently than other investors who do not face similar incentives; this promotes investment, fosters �firms' growth, and enriches shareholders. In the second paper, 'The Wall Street walk when investors compete for flows"', Amil Dasgupta and I show a negative side of delegated portfolio managers' career concerns. When delegated portfolio managers hold blocks of shares in �firms, the more they care about their careers, the less effectively their exit threats discipline �firm managers. Our result generates testable implications across different classes of funds: only those funds who have relatively high-powered incentives will be effective in using exit as a governance mechanism. Finally, the third paper, 'Investment mandates and the downside of precise credit ratings', co-authored with Jason Roderick Donaldson, studies whether the misalignment of incentives between delegated portfolio managers and their investors are tempered with contracts based on precise credit ratings. Surprisingly, we find that while, at equilibrium, portfolio managers write contracts making reference to credit ratings, this is inefficient; in particular, as the rating's precision increases everyone is worse off.

This thesis studies the role of the Bank of England as a lender of last resort (LLR) in the 1870-1914 period. It also considers how the Bank reacted to the failure, or the possibility of failure, of financial institutions. This concern with crises arises out of fractional reserve banking: banks keep only a small proportion of their deposit liabilities in the form of cash, and thus are not able to supply all depositors with cash at any one time. If a sudden demand for cash arises, institutions with no solvency problems can fail due to a lack of liquidity in the financial markets, and widespread problems of this sort may lead to a collapse in the money stock. The role of the LLR is to provide sufficient liquidity to enable institutions to overcome their liquidity problems. The importance of the LLR in the late nineeenth century is that it was only in this period that the Bank of England started to take on the characteristics of a last resort lender. In the last thirty years of the nineteenth century there was an absence of financial crises as compared to the previous two centuries, and it is therefore possible that the Bank of England had by this time altered its behaviour so as to remove the possibility of widespread crisis occurring. It is this question which this thesis examines. A primary objective of the analysis in this study was to identify moments of crisis or potential crisis in the London financial markets between 1870 and 1914, with a view to assessing how the Bank of England dealt with them: did it satisfy our idea of an efficient LLR? We therefore collected data from the Bank's archives which showed the exact pattern of the Bank's discount and advance activities on a daily basis. These data were subjected to a rigorous statistical examination to enable identification of moments of financial tension. The Bank's behaviour was then analysed with respect to the theoretical framework. The results reinforce the conclusions of earlier studies, in that although there was no stated policy stance from the Bank it was prepared to act as a LLR in this period. In addition, it was prepared to "bail-out" institutions which could prove themselves to be solvent but were in need of liquidity. The study provides a great deal of detail as to how the Bank's LLR operations were carried out. Another important factor influencing the Bank's behaviour seems to have been the personality of the Governor. Firm, interested Governors were likely to take a definite policy stance on issues relating to the financial markets whereas weak ones were not.

The aim of this thesis is to investigate the nature of determinants of equity returns as suggested by the CAPM model, in particular, alphas, betas and equity premium and to outline implications for investment managers that statistical and structural analysis of the aforementioned variables may suggest. The thesis contributes to the existing literature in the following areas. First, it addresses the question of predictive power of historical risk-adjusted portfolio performance measures on determining future equity returns in short and long term hoirsons. Second, it investigates the stability of beta coefficients and its impact on portfolio risk and seasonality in equity returns. Third, it assesses the question of dividend yield as determinant of portfolio alphas. Finally, it addresses the question of a common factor that may be influencing movements of equity premiums across European markets. All the aforementioned empirical work is the first of this kind, at least to our knowledge, in the UK. In Chapter One we provide an indirect test of alpha stability. We test if past alphas, information ratio and alpha-to-beta ratio of positive and negative alpha portfolios can be used to determine future portfolio returns. We find that chosen portfolio performance measures do not have any predictive power in the short term investment horisons. However, in the longer term horisons of 24 to 36 months, we document the mean reversion in our portfolio returns and conclude that one can use historical measures of performance to predict returns in the longer run. In Chapter Two we proceed to investigate if stocks with higher beta (systematic risk) also exhibit higher instability in betas as well, thus causing even greater risk for investors. We also examine the seasonality effect in the UK size-based portfolios and try to relate it to seasonality in betas. Our findings suggest that higher beta stocks do have more time-variant betas. Additionally, we find that equity returns are much higher in December-April than in May-November period but we find no robust evidence that such seasonality in returns is due to seasonality in betas but rather due to investors' psychology. In Chapter Three, we assess the relationship between excess returns and dividend yields in the UK market. The econometric analysis reveals U-shaped yield-return relationship in the 1980s and quadratic, bell-shaped, relationship in the 1990s. It seems that such a change in the relationship is driven by the change in the returns pattern of small size stocks in the 1990s. We find no evidence of the tax effect as the explanation of yield-return relationship that we observe. In Chapter Four we try to identify what may be the common determinant of equity risk premium across European markets. We test for the serial correlation in the stock market returns and the results suggest that serial correlation is not in the level of returns but in the volatility of returns. Hence, if shocks to returns and in turn equity premium are persistent, there can be a scenario of a world-wide shock, which may influence the equity premium across countries in the similar manner driving them in the same direction. The overall findings of the thesis are indicating instability of CAPM determinants of UK equity returns. If investors are aware of these instabilities, they can adjust theirinvestment strategies accordingly and generate excess returns on their investment.

The thesis examines the stock and foreign exchange markets of a group of Pacific Basin countries. The main purpose is to investigate the role of foreign ownership restrictions and taxes on potential linkages between these markets, and their interrelations with the rest of the world. The overall analysis highlights the presence of substantial financial links at the regional and global level. In particular, it shows close financial links even for markets with extensive capital controls. It also finds linkages between their stock and foreign exchange markets and that foreign currency risk is a significant component of domestic stock returns. When examining for potential sources of these close financial links, the research indicates that Country Funds have provided indirect ways of foreign participation in the local stock markets and contributed to these financial links. Furthermore, the thesis also emphasised the role of economic integration. of the Pacific Basin countries for their financial integration. The study found that the Asian financial crisis of mid 1997 had some effects on the financial links of the Pacific Basin Rim at the regional and global level. In addition, while the turmoil has increased the economic integration at the regional level, it has reduced economic integration with the U. S. However, the thesis shows that neither Japan, nor the U. S., dominates the Pacific Basin Rim. Some countries, such as Thailand, present closer links with the U. S., and others, such as Korea and Taiwan, with Japan. The evidence provided in the thesis has implications for international portfolio diversification and for the use of foreign exchange restrictions to isolate local capital markets from world market influences.