The first chapter of this thesis develops a model where a number of new hedge funds with unknown and varying ability compete to enhance their reputations by registering high performance relative to their peers. The funds’ choice variable is their return distribution, which financial engineering gives them complete control over subject to a constraint on their means that proxies for ability. This approach has the advantage of not requiring knowledge of fund moneymaking strategies. In all equilibria, funds play tail risk in expectation, and increasing the number of competitors causes tail risk and fund failure rates to rise. This is because a higher number of competitors makes it more difficult to stand out with high relative performance. In the second chapter, a variant of the model where the fund with the greatest Bayesian probability of being a high ability type wins the reputational boost is analysed as a robustness check. Funds still play tail risk, but the results from chapter 1 are weakened by the existence a class of equilibria where tail risk does not increase with the number of funds. Some equilibria of this new model correspond to the setting of Foster and Young (2010), with low ability funds mimicking high ability funds. This is because the more rational version is less like a Blotto Game and closer to a pure signalling model. In the last chapter, an incentive bonus scheme (2 and 20) commonly used in the hedge fund industry is added to the model. When funds play probability mass above the bonus threshold, such a scheme raises failure risk compared to the basic model from part 1 under some mild conditions. When financial engineering that enables return manipulation is available and managers are constrained by innate ability, such a bonus scheme gives funds incentives to play probability mass at high return levels at the cost of tail risk. With the bonus scheme, funds play less probability mass at higher variance above the bonus threshold. The model also returns a restriction on the minimum amount of tail risk.

The objective of this research is to understand what risk management processes are currently in place amongst active European equity asset managers, and to determine which practises are most effective. The focus of this research is on active equity portfolios within the European markets. The thesis is divided in five chapters: 1) Introduction, 2) Introduction and literature of risk management in financial institutions, 3) How risk management is currently used in European funds; a survey of 200 asset managers and hedge funds is undertaken to identify current approaches to risk management, and identify what might need to be improved, chapter, 4) using a unique survey, a comprehensive analysis of the level of risk that pension fund clients (Board Members, Chief Financial Officers, and upper management of organisations with pension funds under third-party management), family offices that invest in hedge funds and Intermediate Financial Advisors (IFAs in UK) are willing to accept, and 5) Conclusions. This will cover the financial crisis and the on-going subsequent recovery. The key findings from Chapter 2 are that there is limited literature in this subject, from Chapter 3 that there is significant issues within the risk management systems utilized by the various asset managers and that there is a need to improve considerably these systems and from Chapter 4 using a unique survey we gather a comprehensive analysis of the level of risk that pension fund clients (Board Members, Chief Financial Officers, and upper management of organisations with pension funds under third-party management), family offices that invest in hedge funds and Intermediate Financial Advisors (IFAs in UK) are willing to accept. To the best of our knowledge, this is the first comprehensive study of current risk management practices within active European equity asset managers.

The freight market is one of the most important and vital ones in the shipping industry, since its behaviour and state affect the majority of the decisions made in the industry. Considering the important aspects of the freight rates and different types/sizes of ships in the dry bulk shipping market, this thesis attempts to increase the understanding of the dynamics of physical hedging instruments and provide robust chartering strategies that can be used to increase the profitability of these operations. The chartering strategies are defined as the best mix of contracts that need to be signed in order to optimise the revenues generated by operating in the freight market. The first empirical part (Chapter 2) assess a widely used approach (i.e. technical trading rules) and examines whether it can allow identifying optimal chartering strategies. Precisely, the study examines the types and aspects of strategies that can be formulated while also analysing their profitability. The results show that the revolution of the freight rates is the key factor when attempting to make an optimal decision. The fluctuations in freight values are usually due to changes in the demand and supply levels therefore a new macroeconomic dataset is constructed in Chapter 3 based on a high number of various demand and supply variables that can affect the level of freight rates. The empirical findings highlight important dynamic interactions between the macroeconomic variables and the freight rate curve while it is also observed that a significant percentage of the freight rate variation is attributed to fluctuations in the supply macroeconomic variables. Finally, in Chapter 4 the thesis analyses the relationship between risk and return in shipping investments from a financial and managerial perspective in order to understand the firms' competitive behaviour. The empirical results indicate that the nature of the risk and return relationship is affected by the risk measures, return measures, subsamples, market conditions and macroeconomic variables associated with the freight rate cycle. Overall, the empirical findings of this thesis have important implications on the freight market trading and risk management as well as chartering operations such as the type of contract that should be signed depending on different market conditions.

After the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, the U.S. banking industry has significantly transformed its organisation structure from banks into bank holding companies (BHCs) as a result of the consolidation process, resulting in larger and more complex BHCs. Under the source-of-strength doctrine and the cross-guarantee authority, a BHC is required to inject capital into the bank subsidiary when it is financially distressed. However, these bank-failed resolutions were introduced before the deregulation; therefore, have not taken into account the increased organisational complexity of BHCs since then. Systemic importance of BHCs has recently attracted attention from policymakers and researchers. Accordingly, the complexity of BHCs will generate concerns about the risk implication of their subsidiaries as compared to the stand-alone structure. This thesis consists of three interrelated essays on stand-alone commercial banks, single-bank holding company (SBHC) affiliates and multi-bank holding company (MBHC) affiliates in the U.S. banking industry. It investigates the role that these financial intermediaries play in (i) banking business activities, (ii) insolvency risk, and (iii) mergers and acquisitions (M&As). The first essay is a qualitative analysis about on- and off-balance sheet analysis, asset securitization and derivatives of these banks which provide a thorough understanding of the difference in permissible scopes of banking business activities among stand-alone banks, SBHC affiliates and MBHC affiliates based on Bank’s Uniform Bank Performance Report. The findings show that SBHC affiliates and MBHC affiliates pursue diversification strategies by running a broad range of activities from traditional lending business to off-balance sheet, asset securitization and derivatives whereas stand-alone banks are more specialised. However, SBHC affiliates show more concentration on taking deposits, issuing loans and demonstrate the most important role in financial intermediation in the U.S. banking system as compared to MBHC affiliates and stand-alone banks. In a striking contrast, MBHC affiliates are dominant in off-balance sheet activities, asset securitization, and derivative activities. This suggests that the MBHC group performs the main role of disintermediation in the U.S. The second essay compares the differences in insolvency risk of stand-alone banks, SBHC affiliates and MBHC affiliates by using U.S. commercial bank data and BHC data from 1994 to 2012. The study’s results show that MBHCs in the U.S. have lower insolvency risk than SBHCs and stand-alone commercial banks at the parent levels, but have significant higher insolvency risk than both at the subsidiary levels. These results suggest that BHC affiliates benefit from an internal capital market and increased diversification from the BHC structure, but face risks of the increased complexity if the number of subsidiaries increases. The third essay investigates the difference in the likelihood of being targets and acquirers among stand-alone banks, SBHC affiliates and MBHC affiliates by using M&A data on U.S. commercial banks from 1997 to 2012. The reported results show that MBHC affiliates exhibit a greater likelihood of being targets than do stand-alone commercial banks, while stand-alone banks have a greater probability of becoming targets than do SBHC affiliates. The findings show that MBHC affiliates tend to have a greater likelihood of being acquirers than do SBHC affiliates. SBHC affiliates have a greater probability of being acquirers than do stand-alone banks. Those banks that acquire another bank within the same MBHC structure tend to be smaller and more financially constrained than those banks acquiring outside the same MBHC structure, whereas targets that are acquired by another bank within the same MBHC structure tend to be smaller, with higher profitability and capital than targets that are acquired by banks from outside the MBHC structure. The results suggest that the MBHC parent attempts to discipline distressed, poorly performing and smaller affiliates by involving them in M&As. To sum up, this study provides four policy implications. First, regulators should devote particular effort to regulating banks at the subsidiary levels to restrict their risk-taking behaviour. In this sense, the regulators should revise the source-of-strength doctrine cross-guarantee authority to ensure that MBHC affiliates can receive their parent’s bail-out in the future when in distress. Second, regarding complexity issues inside BHC structure, regulators should consider risk exposure between banks affiliated with SBHC and MBHC separately. Third, understanding the fact that MBHC parent attempts to hinder inherent risks of their subsidiaries by involving them in successive M&A inside the structure, the bank regulators should put more restrictions on their M&A applications and reveal their problems to the financial market. Finally, stand-alone banks should be encouraged to transform into SBHC affiliates in the future. Consequently, the Federal Reserve should make the path easier for banks to transform into SBHCs to increase their stability in the U.S. banking system.

The purpose of this empirical study was to explore the extent to which the marketing concept had been accepted and implemented by the Islamic banks in Jordan. To achieve this, a survey of the Islamic banks' managers and customers was carried out. The survey questioned the managers, at both senior and branch levels, concerning their opinions about the understanding, acceptance and implementation of the marketing concept. Customers' opinions were also explored with particular regard to the factors considered to be important in choosing to bank with Islamic banks; services used; personal characteristics; the importance of promotional media; and the banks' role in informing customers about the Islamic banking concept. The findings of the study were that Islamic banks in Jordan have a narrow understanding of the marketing concept. These banks were found to be value - rather than profit-orientated. They accepted many of the facets of the marketing concept such as customer orientation, profit orientation and social orientation, while they downgraded the status of marketing activities. It was found that while some customers were gained from the nonbanking segment of the market, the banks won approximately two thirds of their customers from conventional banks. However, some customers were not impressed by the Islamic banks to the extent that they continued their patronage of other banks. This study is important in the light of the increasing growth of Islamic banks. It provides empirical data about the marketing orientation of the Islamic banks in Jordan which cannot be found elsewhere. It contributes to a better understanding of the ways in which the banks could increase their effectiveness by providing guidelines and the implications for marketing strategies. The research methodology and instruments used will help researchers to conduct studies in the field of financial services marketing in the Arab-Muslem countries.

Liquidity is one of the most intensively topics researched in financial economics for the last decade. Against this backdrop, this thesis attempts to address issue of liquidity in derivative markets and derivative models. It begins with the provision of empirical evidence that liquidity risk can serve as an additional risk factor to market risk factor in pricing the commodity futures and it also outlines the vital role played by liquidity in futures prices of commodity co-movement and co-integration. Empirical evidence yields strong support on futures pricing model building, where factors should include both market risk and liquidity risk. On above basis, this thesis builds two-factor futures pricing model by taking liquidity risk into account. I have also used 20-year oil futures market data to empirically justify liquidity-adjusted futures pricing model compared with traditional future pricing model without liquidity factor. I utilize mean pricing error (MPE) and root mean squared error (RMSE) to estimate errors for both models and I also adopt T-test for statistical significance justifications. For most years, liquidity adjusted futures pricing model performs better than the traditional model with results being statistically significant. More importantly, liquidity adjusted futures pricing model can predict spot prices and futures prices simultaneously, which means only one model can be applied in both spot price predictions and futures price predictions based purely on historical market information. Existing models either predict futures prices by using spot prices (e.g. Black, 1976) or use futures prices to predict spot prices (e.g. Reichsfeld and Roache, 2011). As a result, my model has a great degree of prediction power with its prediction errors being less than 3\%, which is relatively small. Therefore, it is arguable, that liquidity risk plays a key role in commodity futures markets and illiquidity of those assets could prove influential on firms' daily operations. I also build an intrinsic nexus between real options theory and real asset illiquidity to accommodate this issue. Study of the new real options model reveals effects of real asset illiquidity towards investment threshold and flexibility values, namely, exercise boundary and real options values, which is complementary to existing real options and corporate finance literatures. Instead of constructing free boundary line, which shows effects of time and asset price, the model presents a three-dimensional ‘free surface’, which indicates not only effects of time and asset price, but also that of asset illiquidity. The new model contributes to two types of existing literatures. The first type focuses on effects of real asset illiquidity (mainly physical asset) on corporate investment and cost of capital. Illiquidity of existing physical assets will decrease corporate investment and increase cost of capital (Gan, 2007; Flor and Hirth, 2013, and Ortiz-Molina and Phillips, 2014). In addition to physical asset illiquidity, I distinguish physical asset from (expected) inventory asset within real asset category. The new model shows that the inventory asset illiquidity would also shape the corporate investment behaviors. Additionally, the model also relates to literatures that document investment booming during unfavourable market conditions. I argue real asset illiquidity could engender the suboptimal exercise of real options. Simulation results of the new model illustrate that investment threshold becomes lower as waiting value and flexibility get eroded by asset illiquidity. Because of lower exercising boundaries, firms have higher a probability to exercise real options, but at lower values, which results in suboptimal exercise of real options. The suboptimal exercise of the real options due to the asset illiquidity might provide an interpretation for the investment booming during unfavourable market conditions. More importantly, I argue that the suboptimal exercise of real options might undermine firm value and thus firms shall be more prudent to invest when the environment is unfriendly.

This thesis is concerned with the origins of exchange rate instability and the scope for economic reform. Several aspects of recent macroeconomic instability in Russia are discussed which, we argue, reveal the origins of this problem. The first chapter combines currency substitution and price stickiness. It aims to account for the weakness of the real exchange rate and the net accumulation of foreign exchange, that so frequently characterise unstable economies. The essence of the discussion is that, when faced with severe tight controls on capital, agents are able to substitute foreign currency for local currency via the current account. The model has a simple dynamic structure, similar to the Dornbusch model. The second chapter uses the Cohen and Michel procedure to extend the time inconsistency approach to an open economy, a-la-Dornbusch framework. A special loss function is used, but the same methodology may be applied to address other economic issues. When time consistency is assumed, future loose monetary policies are foreseen and hence have current consequences. We argue that the more the government has an inflationary instinct, the greater the experience of undervaluation and the fall in liquidity. The third chapter builds on the work of the second. It is argued that even in this open economy. a-la-Dornbusch framework, the standard result holds: credibility is enhanced by delegating monetary policy to a conservative central banker. The economic consequences of this are twofold: a smaller real exchange rate undervaluation and a reduced fall in liquidity. In addition, we propose an extension of this analysis by letting currency substitution, between domestic and foreign assets, be the alternative assumption to perfect capital mobility. The assumption of currency substitution leaves largely unchanged the dynamic structure of the analysis, but gives rise to a quite different economic interpretation. The fourth chapter describes the reasons why policy makers decide on restrictive foreign exchange policies. A currency substitution framework is used to highlight the consequences of foreign exchange leakages between official and black markets. The model is solved by applying the technique suggested by Dixit and Currie to determine the free variable as a function of the predetermined variables of the system A fifth chapter attempts to pull together the main arguments, and conclusions arising from these, which have been discussed throughout the thesis.

This thesis entails the examination of the determinants of the cross-section of stock returns in the London Stock Exchange, over the period July 1975 to June 1996, and it brings us a step further in the integrated real and financial view of the firm’s stock returns. The recent empirical evidence on the behaviour of stock returns in the U.S. and other equity markets around the world is reviewed in chapter 2. We broadly classify the findings as being cross-sectional (e.g., asset pricing anomalies) or time series (e.g., calendar effects, return autocorrelations and other forecasting variables) in nature. Chapter 3 describes our data set and presents the methods used to test the alternative hypothesis that the expected stock returns were not determined solely by their risk characteristics such as market beta, but other additional characteristics. In order that our results should have greater appeal, we use a broad data set on 1,420 stocks quoted on the London Stock Exchange. Thus, the use of such a broad data set provides a unique opportunity for the analysis of the behaviour of stock returns. The Tobin’s q ratio (the ratio of the market value of the Firm to the replacement costs of its assets) in explaining the cross-section of average stock returns introduced in chapter 4. Our motivation for using the Tobin’s q, for the first time in this literature, as an additional variable in explaining the cross-section of average stock returns is the lack of theoretical rationale of the predictive ability of the Firm-specific variables. Tobin’s q allows us to suggest that it may incorporate, to some degree, potential alternative sources of risk such as product price risk, poor investment opportunities risk and Financial distress risk. Our results confirm the Tobin’s q effect; stocks with a smaller Tobin’s q ratio yield a higher average returns. An investigation into the relationship between the average return and the most common used variables in the U.S. and Japanese markets (such as market value of equity, book to market equity, leverage, earnings to price, cash flow to price and dividend yield), as well as their relationship with each other is reported in chapter 5. Our results confirm that the empirical regularities observed in the U.S. market also exist in other countries (e.g., U.K. stock market). Thus we conclude that it is extremely unlikely for the book to market equity and the market value of equity effects, which are reported for the U.S. stock market, to be a consequence of data- snooping.

This thesis considers two major issues in the context of empirical research into the U K stock market: (i) what is the ability of five models (the naive market return, the market model, the CAPM, the APT, and the LAPT) for predicting the U K stock market price behaviour and (ii) does the U K stock market have long-term overreaction Chapter 2 reviews the literature of some financial topics In Chapter 3, an asset pricing model called the Leveraged Asset Pricing Theory (LAPT) is developed Unifying the Arbitrage Pricing Theory and the Modigliani and Miller Theory of capital structure, the model allows the changes in the underlying leverage variable of each company at time t-l to have immediate impact on its beta estimated at time t. The predictive experimental procedures are designed, in Chapter 4, to examine the ability of the LAPT and other conventional models with different beta estimates to predict U K equity returns Through the estimation procedures, the Trade-to-Trade and the Discount Weighted Estimation methods, based on Bayesian Forecasting, are used to avoid the problems of the nontrading effect and variation in parameters, respectively. The results, in Chapter 5, showed that when the year 1987 is added to the test, the predictive ability of both the APT and the LAPT becomes higher and the LAPT, which makes explicit the leverage factor in its structure, does even better job than the APT in market valuations around that period as more common factors are extracted for the LAPT Based on the controversial work of De Bondt and Thaler (1985), Chapter 6 examines the long-term overreaction behaviour of the U K stock market for the period 1965 to 1993. After relating the findings of this empirical study to the predictive ability of those benchmarks (the naive model, the market model, the CAPM, and the size-adjusted CAPM) used, the results indicate that the apparent evidence for overreaction depends upon the benchmark employed The better the benchmark in terms of high predictive power and low statistical measurement error the less we are unable to reject the null hypothesis of no overreaction We find that we are unable to reject the hypothesis of U K stock market efficiency with respect to the Contrarian Investment Strategy of De Bondt and Thaler.

This thesis examines different factors that affect risk and return of equities of Chinese firms engaging in international trades through three studies. The first study investigates the sensitivity of exchange rate fluctuations to firm returns through exchange rate exposure. We improve methodologies employing in existing studies by constructing a firm-specific exchange rate index based on destination-specific export and import values. The empirical results show that our improvement can detect more percentage of firms showing significant exchange rate exposure than conventional approaches and that higher proportion of Chinese firms are exposed to exchange rate when the exchange rate regime is changed from fixed to managed float. The second study decomposes risk premium of Chinese exporting firms by their export destinations to assess if return from exporting to each country is well rewarded for the risk taken, that is, having a positive risk premium. Risk premium of firms is assumed to be influenced by risk premium from a domestic market, risk premium contributions from current export destination countries and from potential export destination countries. Our methodology of risk premium decomposition takes into account the time-varying nature of risk factors of exports. The empirical results reveal that trading in a domestic market provides positive risk premium while current and potential exports can provide positive or negative risk premia depending on destination countries. The last study explores volatility spillovers to Chinese stocks over trade, exchange rate and stock market liberalization events in China. We investigate volatility spillovers from the major stock markets in the US, the UK and Japan to Chinese stocks. Besides, we also breakdown Chinese stocks by portfolios of exporting, domestic manufacturing and domestic services firms to investigate both volatility spillovers from foreign stock markets and volatility spillovers across portfolios. The stock return volatility of one variable is decomposed into its own volatility and volatility spillovers from others. The empirical results show that the nature and extent of volatility spillovers to Chinese stocks vary across economic liberalization episodes. Moreover, the main contributor of volatility spillovers from foreign markets is the US stock market. Nonetheless, in all events, the major source of volatility for Chinese stocks is mainly from shocks in Chinese market rather than shocks in international stock markets.