This essay is intended to be broad in scope. Therefore, inevitably, it touches on some issues which are not explored in detail in the articles listed above and which, for reasons of space, cannot be given the detailed attention they deserve here. There is much scope for further research. ' The essay is structured in six parts. Part 1 traces the historical development of liability insurance as an outgrowth of accident insurance, a broad miscellaneous class with its own origins in the revolutionary changes in industry, trade, and transport that began as the eighteenth century drew to a close. Part 2 analyses the problems that began to emerge once liability insurance became a class of insurance in its own right. This section shows, in particular, how liability insurers came to assume long-tail risks, exposures of a kind that were always regarded as uninsurable in the context of firstparty insurance. Part 3 looks at how insurers have responded to these difficulties and examines the technical problems they face in attempting to design contracts that satisfy both the security requirements of policyholders and their own need to price liability risks accurately and reduce their uncertainties to manageable proportions. Part 4 examines behavioural aspects of liability insurance and the issue of moral hazard: the possibility that the granting of insurance cover might promote opportunistic behaviour or modify human actions in a way that adversely affects the interests of insurers, or society as whole, or both. It is argued that this phenomenon takes on extra dimensions in the context of liability insurance, creating additional layers of uncertainty for insurers and greater potential instability for liability insurance systems. Part 5 examines a connected issue: the relationship between liability insurance and liability rules, especially those of tort law. Here we consider the extent to which the existence or availability of insurance impacts upon judicial and legislative policy, and the extent to which it should properly do so. The essay concludes, in Part 6, with a summary of the issues explored and an assessment of possible future developments in liability insurance markets. As part of this assessment the perceptions of the major stakeholders in the systems that employ liability insurance are considered, including liability insurers, the Government, the general public and the lawmakers. It is observed that these perceptions - as to the proper role of liability insurance, and what can be achieved effectively through its use - differ widely. The author concludes that all would benefit from a better informed and, perhaps, more realistic assessment of what liability insurance can do, and what it cannot. If the system is to remain stable, there is a need for a greater understanding of the problems of liability insurance, and the limits of its effectiveness, amongst all stakeholders in the tort/liability insurance system, including the lawmakers, the Government, the public at large and insurers themselves.

This thesis attempts to provide a comparative and comprehensive understanding of corporate dividend policy in European Countries. I examine the dividend policy of the firm in the UK, Germany, France and Italy. The thesis is motivated by the importance of dividend policy theory in the area of finance, the mixed theoretical and empirical evidence, the predominately US based literature and by the financial, institutional and corporate governance differences between European countries. The thesis examines the "big three imperfections" of the dividend policy: taxation, asymmetric information and agency costs. The uniqueness of the thesis is its European character. The main argument is that differences in taxation and corporate governance systems between European countries can prove a useful tool for providing some answers to the dividend puzzle. With respect to dividend taxation systems the UK operates a partial imputation system while Germany, France and Italy operate full imputation systems. With respect to the corporate governance systems the UK is characterised as a market-based country while Germany, France and Italy are characterised as bank-based systems. In general results show that there are significant differences between dividend taxation systems in European countries that result in variations of the tax discrimination variable. In all countries ex-day returns are positive and significant suggesting that ex-day prices fall by less than the amount of dividends. Results confirm that in countries where the differential taxation between dividends and capital gains is high, ex-day returns are high. Also, I find that changes in the tax systems that affect taxes on dividend and/or capital gains alter significantly ex-day returns. Furthermore, the corporate governance differences between market-based and bank-based countries result in different levels of information asymmetries and/or agency conflicts. Results in all the countries show significant share price reaction on the dividend announcement days. Evidence provides support to the information content of dividend hypothesis. Moreover, I do not find evidence to reject the signalling hypothesis over the over investment hypothesis.

This dissertation studies the patterns of term-structure of implied volatility and examines the performance of different specifications of time-series and options-based volatility forecasting models under the influence of the observed market biases. Our research is based primarily upon the use of S&P 500 data for the period 1982-2002. There are three self-contained but seemingly related projects in this dissertation. The objectives of this research are: 1) to characterise the term-structure of implied volatility; 2) to compare the performance of asymmetric power ARCH and EGARCH models; 3) to evaluate the forecasting performance of time-series and options-based variance swap valuation models. The observed market anomalies in the term-structure of implied volatility of S&P 500 futures options are investigated between 1983 and 1998. Term-structure evidence indicates that short-term options are most severely mispriced by the Black-Scholes formula. We find evidence that option prices are not consistent with the rational expectations under a mean-reverting volatility process. In addition, skewness premiums results show that the degrees of anomalies in the S&P 500 options market have been gradually worsening since around 1987. As correlation may be responsible for skewness, our diagnostics suggest that leverage and jump-diffusion models are more appropriate for capturing the observed biases in the S&P 500 futures options market. Sixteen years of daily S&P 500 futures series are employed to examine the performance of the APARCH models that use asymmetric parameterisation and power transformation on conditional volatility and its absolute residual to account for the slow decay in returns autocorrelations. No evidence can be found supporting the relatively complex APARCH models. Log-likelihood ratio tests confirm that power transformation and asymmetric parameterisation are not effective in characterising the returns dynamics within the context of APARCH specifications. Furthermore, results of a 3-state regime-switching model support the notion that the performance of conditional volatility models is prone to the state of volatility of the returns series. In addition, AIC statistics stipulate that EGARCH is best in "noisy" periods whilst GARCH is the top performer in "quiet" periods. Overall, aggregated rankings for the AIC metric show that the EGARCH model is best. Options-based volatility trading exercises also reveal that EGARCH and GARCH can generate statistically significant ex-ante profit in one out of four sample periods after transactions costs. When considering a stochastic volatility model, there seems to be little incentive to look beyond a simple model which allows for volatility clustering and a leverage effect. The volatility forecasting performance of different specifications of time-series and options-based variance swap valuation models on the S&P 500 index is evaluated from three months before to after the 9/11 attacks. By far, the option-basedD emeterfi et al. (1999) variances wap valuation framework is the most popular tool to price variance swaps. This framework stipulates that pricing a variance swap can be viewed as an exercise in computing the weighted average of the implied volatility of the options required even under the influence of volatility skew. Our research design offers a comprehensive empirical study of the relative merits of competing option pricing models. Based on results from six carefully chosen contract days, we illustrate that implied models may overpredict future variance and underperform time-series models. The reasons could be: 1) the implied strategy was originally developed for hedging; 2) implied volatility is predominantly a monotonically decreasing function of maturity and therefore options-based strategy cannot produce enough variance term-structure patterns; 3) distributional dynamics implied by option parameters is not consistent with its time-series data as stipulated by the maximum likelihood estimation of the square-root process. Future research needs to use a larger sample set in order to establish a more statistically significant result to justify our findings. Until then we have a strong reservation about the use of Demeterfi et al. methodology for variance forecasting.

This research begins by developing and applying techniques for the evaluation and risk analysis of real estate investment that are commonly used in other areas of finance and in actuarial science. Option pricing techniques for the evaluation of real estate investments that have options embedded within their lease terms are then developed and applied to the valuation of upward only rent review properties under the assumptions of a variety of financial conditions. Techniques for pricing embedded options are developed that do not require the restrictive financial assumptions of traditional option pricing techniques. Finally, the research uses a form of asset/liability modelling to determine the optimal amount of real estate investment in different forms of pension scheme. The problem of "valuation smoothing" inherent in many asset allocation models using real estate data is recognised and overcome. These strands of research are linked in the essay that forms the first part of the thesis.

Using a comprehensive data set on (surviving and non-surviving) UK equity mutual funds (April 1975 - December 2002), this study uses a bootstrap methodology to distinguish between `skill' and `luck' in fund performance. This methodology allows for non-normality in the idiosyncratic risks of the funds -a major issue when considering the `best' and `worst' funds and these are the funds which investors are most interested in. The study points to the existence of genuine stock picking ability among a relatively small number of top performing UK equity mutual funds (i. e. performance which is not solely due to good luck). At the negative end of the performance scale, the analysis strongly rejects the hypothesis that most poor performing funds are merely unlucky. Most of these funds demonstrate `bad skill'. The study also examines the economic and statistical significance of persistence. Sorting funds into deciles based on past raw returns or on past 4-factor alphas, strong evidence is found that past loser funds continue to perform badly in terms of their future 4-factor alphas while little evidence is found that past winner funds provide future positive risk adjusted performance. However, on investigating relatively small `fund-of-fund' portfolios of past winners, evidence of positive persistence is found. Using a cross-section bootstrap approach the study derives the empirical distribution of final wealth at a 10 year horizon and finds that if transactions costs are above 2.5% per fund round trip, a passive strategy seems at least as good as the active strategies examined while with transactions costs of 5% the passive strategy is most probably superior. The study also examines the market timing performance of the funds. Using a nonparametric test procedure the study evaluates both unconditional market timing and timing conditional on publicly available information. A relatively small number of funds (around 1%) are found to successfully time the market while market mistiming is relatively prevalent.

This thesis aims to make a contribution to the understanding of the key economic and company specific components of credit spreads in the investment and non-investment grade US bond market for different maturing bond indices. It calls for the full integration of different market andfirm specific variables into a unique framework, in order to predict credit spread changes. Key determinants of default risk are employed to determine credit migration risk. Particularly, this thesis provides evidence as to the relation between different macroeconomic factors and credit spread changes in all different maturities and rating categories, it supports the use of the consumer confidence index, as the most important variable explaining changes in credit spreads in investment and high yield companies, but most importantly it provides support for the strong informational content of high yield spreads as predictors of output growth, based on Option Adjusted Spreads. It favours the inclusion of implied volatilities in explaining credit spread changes, while it criticises the incorporation of historical ones. Throughout the thesis, it becomes evident that BBB-rated bonds exhibit highly volatile patterns and are very difficult to model. Financial ratios adjusted to reflect depreciation and amortisation expenses, which are usually very high for non-investment grade companies, prove to be very important in explaining changes of high yield spreads. However, firm specific risk, accounts only for a small fraction of the variation in the investment grade category. Ultimately, it is shown that by using solely market (equity and macro variables) and firm specific variables, i. e. some of the key determinants of default risk and the price of credit risky debt in most Merton-type models, we can accurately forecast credit spread changes at least one year ahead, particularly based on results provided from the investment grade sample. Moreover, credit spread forecasts, based on our set of OAS, tend to be overestimated rather than underestimated, as opposed to results provided by previous studies. This makes forecasts more conservative and therefore more appealing for risk management purposes. In particular, this thesis is focused on the main drivers of credit spread movements in the US corporate bond market. There are four issues mainly considered. The first part of the thesis examines a question that is a point of central focus in the fixed income literature, i. e. the relation between credit spread changes and the macroeconomic cycle. This chapter is inspired by the relatively little work that has been done on the empirical relationship between credit spread changes and the macroeconomy, since most of the literature on this issue focuses on macroeconomic variables and the modelling of default risk. We investigate how this relation evolves, not only with respect to short, medium and long term maturities but also for investment and non-investment rated companies, by testing the direction of causation among economic variables and credit spreads and by employing different sets of data and estimation techniques to explore the relation. We find that irrespective of the statistical method used or the time period tested that the most important variable in explaining the variation of credit spread changes is the US Consumer Confidence Index. We affirm the negative relation between the consumer confidence index, money supply and changes in credit spreads but not for the variables of GDP and industrial production. The negative relation between the term structure and credit spreads is also asserted for investment grade bonds of all maturities, consistent with the structural model's theory, while we find this relation to be positive for non-investment grade companies. Results from the OLS regressions suggest that macroeconomic variables alone, can explain at best a 17% of the variation in medium and long term maturing indices, and a 20.5% in short term indices. Findings from cross sectional regressions suggest that macroeconomic factors alone can explain 27.9% of the variation in credit spreads for investment grade bonds and a 44.4% for high yield ones. When testing the direction of causation, wefind thatfor long and medium term maturity investment grade indices we reject the null hypothesis that macroeconomic variables don't granger cause changes in credit spreads, but not for short term maturities and the high yield sector. Indeed, results provided on that respect from the high yield category, provide evidence that non-investment grade spreads may be a good proxy for predicting estimating overall financial conditions. Secondly, the relation between credit spreads and equities together with their implied and historical volatilities is examined. This chapter constitutes an effort to fill the gap in the existing literature, which has focused mainly on bond returns or yield changes, while very limited work has been done in modelling credit spread changes. 12 Empirical evidence points out to the fact that debt markets not only in the US but also in Europe and elsewhere seem to be greatly affected by the movements in the equity markets. If that is the case we should expect changes in equity prices to affect changes in credit spreads. This assumption is tested on a cross sectional and time series basis, for quarterly and monthly frequencies and by using company specific equity prices against the respective credit spreads, but also by including equity and volatility indices. We find that there is a negative relation between credit spread and equity changes, irrespective of maturity or rating category. Results provided by univariate regressions, based on changes in equity prices alone, explain haýr of the variation of B-rated corporate spreads. Results affirm the positive relation between implied volatilities and their high explanatory power on credit spread changes while findings derived from historical volatilities although statistically significant don't even marginally support the hypothesis of explaining the variation in credit spreads. In particular, results from pooled regressions suggest that when implied volatilities are substitutedfor the historical ones, adjusted R2 sfell to 6% and 28%for the investment and non-investment grade samples respectively (from 25% and 50.3% for investment and non-investment grade companies, when implied volatilities are considered). Resultsfrom OLS regressions, suggest that equity variables explain at best a 44% for short term maturing indices, and 35% and 37% for medium and long term maturing indices 2 as reflected by the adjusted R S. We also strongly reject the null hypothesis that implied volatilities don't granger cause changes in credit spreads but only with regards to short and medium term maturities. The next chapter of the thesis focuses on how changes in a company's financials, as those are presented by ratios, actually infiuence changes in credit spreads. The reason for including this chapter is due to the fact that although traditional ratio analysis has been widely investigated, it has mainly been tested within the context of default risk, while very limited literature exists on the use of traditional credit risk analysis in determining credit spread changes. Cross sectional analysis is employed in this chapter to test the hypothesis that credit spread changes are influenced by changes in accounting factors, both in investment and high yield categories. On a multivariate basis, we find that 63.5% of the variation in high yield credit spreads is explained by the changes in financial ratios, as reflected by the adjusted R2, compared to an adjusted R2 of 19.2% for investment grade companies. Consistently, 13 in the randomly selected group of companies, we find that traditional ratios can explain one third of the variation in credit spreads in the high yield sector, although less than 10% in the investment grade sample. A reason for the higher explanatory power in the high yield sector entails the use of ratios adjusted, to reflect depreciation and amortisation expenses, which hasn't been considered before. The most statistically and economically significant coefficient was obtained from the current market capitalisation, which was used as a proxy for the firm's size. The last part of the thesis, constitutes an effort to combine all the above factors (macroeconomic, equity and financials), in order to forecast credit spread changes one and two years ahead. We show that on a multiple regression context, results provided are consistent with previous chapters and indeed highly significant in explaining credit spread variation, irrespective of the time period tested. For the total sample we get an adjusted R2 of 95% or 52% as part of the weighted and unweighted statistics respectively. A robust model is identified for forecasting credit spread changes one year ahead, with the employment of the dynamic solution method. The accuracy of the model doesn't fall below 85% within the first year, while we choose as the most vigorous method for estimating coefficients the GLS method adjustedfor heteroscedasticity, since it consistently provides more conservative forecasts.

This thesis is one of the first studies to empirically examine the nature and source of financial distress, and the valuation effect of distressed companies' restructuring announcements, in an emerging market context. By describing and comparing the Chinese bankruptcy code with those of seven other countries, I find that the government's political interests and intervention, aggravated by the country's weak enforcement mechanism, result in the formal procedures rarely being used in practice. Consequently, the threat of bankruptcy is weakened and creditor protection is limited. These issues are confirmed by my empirical analysis. My empirical studies are separated into two distinct themes: China as a whole compared with what is documented in the literature; and within China state owned enterprises (SOE) versus non-SOE. Firstly, I analyse operating and financial performance and operating efficiency for 100 firms that became distressed between 1999 and 2003. I find that during the first year of distress, the main source of distress is economic, not financial. In addition, for a significant minority of firms, financial factor plays a greater role in causing cash flow shortfall prior to the onset of distress. For this reason, I believe that due to the lack of timely restructuring mechanism, financial distress leads to economic distress. My SOE versus non-SOE results suggest that "soft budget constraints" are widespread among SOEs. However, such lending bias towards SOEs does not save these SOEs from being distressed. The deliberate channeling of funds to inefficient uses results in the distortion of capital allocation. Secondly, I investigate the valuation effect of restructuring announcements made by 100 firms. Comparing to the literature, I find that asset restructuring including mergers and acquisitions (M&A) and asset sales are more frequently employed. It is the most popular strategy in my sample. In the light of difficulties in officially liquidating economically unviable firms in the Chinese context, mergers and asset sales are perhaps a market selfcorrection mechanism to ensure asset mobility, which is essential for the effective operation of an enterprise economy. Consistent with the general M&A literature, M&A creates value for the target firm shareholders. In addition, asset sales are not perceived positively by the market. A potential explanation is that the lack of bankruptcy threat in China minimises the potential benefit of avoiding bankruptcy costs which shareholders otherwise have to bear. In my SOE versus non-SOE study, M&A with payment strategy is effective only for the non-SOE firms. On the contrary, the government's attempt to revamp SOE performance by transferring the controlling ownership, either with or without payment, is not seen as effective by the market. My results also suggest that debt governance is not at work among SOEs and this affects the effectiveness of debt related restructuring. The fundamental conclusion is that government ownership has an adverse impact on the distress-resolution process as it distorts resource allocation, management incentives and investment decisions. An effective bankruptcy regime should be more independent from politically motivated government intervention.

Historically, different index construction methodologies have been used to represent the behaviour of real estate markets. They can be grouped into four main categories: valuation based indexes and transaction-based ones, synthetic measures (e.g. created by using prime rents and yields) and vehicle-based performances (property companies and Real Estate Investment Trusts). Each measure requires a different set of data. When we consider markets with thin information, data availability plays a major role in defining the applicability of these construction methodologies. Moreover, if the aim of an index is to show long-term performances in such markets, individual property data (e. g. periodic valuations) used by main index providers may not be retrievable historically. This work describes main index construction methodologies used in the property industry or suggested in relevant finance literature. Three new methodologies are applied to the UK market and their ability to represent a "true" estimate of market performance is tested by comparing these new figures with the current valuation-based index. The first methodology employs purchase prices and last valuations to create repeated-measure regression returns. We find this index to behave more similarly to an unsmoothed version of the valuation based index than to its original series. Secondly, we obtain an estimate of market performance from vehicle-based in formation by adopting a weighted average cost of capital framework. Finally, we apply a capital asset pricing model net of illiquidity costs to public real estate returns and find an improvement in correlation coefficients even at a monthly frequency. All these three methodologies may be used to create historical series in markets where information are not easily available. They all represent a good proxy for unsmoothed real estate returns, The choice between these three methodologies should be data driven since there is no theoretical a-priori to prefer one to another.

Since the stock market crash of October 1987, academics and policy makers have been very concerned about the causes of the crash and whether the microstructure of the equity market should be redesigned to protect the market from drastic fluctuations. For their concerns, circuit breakers have been recommended as the mechanisms for the market stabilisation and for reducing the volatility of the stock market. Empirical and theoretical studies carried out so far have not been able to conclusively resolve the debate on the effects of circuit breakers on financial markets. As a result, this thesis aims to contribute to the market microstructure literature and to add empirical content to current academic and policy discussions, by conducting an investigation on the effects and implications of circuit breakers on financial markets, focusing on daily price limits, transaction taxes and margin requirements, with specific reference to the Greek capital market. Based on our empirical findings, we provide little evidence in support of the effectiveness of the above regulatory measures, in line with previous literature. Furthermore, our empirical findings suggest that both researchers and policy makers. should continue their efforts to conduct further tests on their suitability, as well as in exploring other mechanisms and channels, which might be more effective in stabilising the market and reducing volatility. Finally, the empirical findings in this thesis support what Roll (1989) stated over 17 years ago in his comprehensive review on the implications for regulatory policy. that there is little evidence in favour of the efficacy of margin requirements, price limits and transaction taxes.

In this thesis it is developed and demonstrated the workings of a copula-based technique that allows the derivation of dynamic trading strategies, which generate returns with statistical properties similar to hedge funds. It is shown that this technique is not only capable of replicating fund of funds returns, but is equally well suited for the replication of individual hedge fund returns. Since replication is accomplished by trading futures on traditional assets only, it avoids the usual drawbacks surrounding hedge fund investments, including the need for extensive due diligence, liquidity, capacity, transparency and style drift problems, as well as excessive management fees. This replication technique is also used to evaluate the net-of-fee performance of 875 funds of hedge funds and 2073 individual hedge funds, up to an including November 2006. Comparing fund returns with the returns on dynamic futures trading strategies with the same risk and dependence characteristics, no more than 18.6% of the funds of funds and 22.5% of the individual hedge funds in the data sample convincingly beat the benclunark. Besides the replication and evaluation of funds which already exist in the market, this technology can also be used to create new funds with previously unavailable return characteristics, the so-called `synthetic funds'. In a set of four out-ofsample tests over the period January 1998 - February 2007, it is shown that the replication-based strategies are indeed capable of accurately generating returns with a variety of properties, including negative correlation with stocks and bonds and high positive skewness. The synthetic funds also produce impressive average excess returns. Disappointing performance is leading hedge fund investors to look for cheaper alternatives to invest, such as indices of hedge funds. Unfortunately, investable hedge fund indices are nothing more than funds of funds in disguise, with performance similar or even worse than real funds of funds. The replication technology generates returns with statistical properties very similar to those of hedge fund indices, and a higher average return for most hedge fund categories, but without actually investing in hedge funds.