Financial stability remains a key theme in UK financial regulation. This thesis investigates important issues of financial regulation revealed in the financial crisis of 2007-2009. It will analyse macro and micro prudential regulatory weaknesses in UK financial regulation in light of the financial crisis of 2007-2009. The structure of the new ‘twin-peaks’ model in the UK will be compared with the Australian ‘twin-peaks’ model. There are concerns that the Bank of England might have too much power and is thus a super single financial regulator in the ‘twin-peaks’ model. The author will compare the new ‘twin-peaks’ model with the German regulatory structure, where some similarities are found due to the sharing of supervisory responsibilities between the regulatory bodies in both jurisdictions. As far as the author is aware, there is a gap in the literature because the ‘twin-peaks’ model in the UK only came into existence in April 2013 and the literature in comparing this model with the Australian and German models is scarce. The thesis adopts a doctrinal, comparative case study approach, as well as a quantitative analysis of the important financial ratios of four major UK banks and four major Australian banks. The thesis will reveal that the Financial Services Authority (FSA) failed to supervise banks such as Northern Rock, Bradford & Bingley and HBOS properly. The main regulatory and supervisory failures of the FSA are due to organisational and management problems. With regards to the statutory provisions on banking regulation, the Financial Services Markets Act (FSMA) 2000 is complicated, with standards and principles underpinning the FSA’s statutory core objectives. The FSA’s remit is too wide. It is responsible for regulating banks, deposit-taking institutions and insurance companies. With the development of complex products, increased use of securitisation and merging of financial services offered to customers, the tripartite system increasingly found it difficult to delineate their scope and responsibility. Overall, the FSA’s passive, non-interventionist and laissez-faire regulatory approach led to criticisms that its measures were too late and too little. In comparison to the big four Australian banks, the thesis revealed that the big four UK banks had on average, higher cash ratio, higher leverage ratio, higher loan to deposit ratio, higher capital ratio, lower asset quality, lower return on assets but higher return on equity than the big four Australian banks. There is gradual convergence between the UK and Australian prudential supervisory models although there are still some differences between the two models. Financial stability is enshrined in both countries’ legislation and is a key priority after the financial crisis of 2007-2009. Both regulators reject a ‘zero-failure’ regulatory policy. The Prudential Regulatory Authority (PRA) shares the Australian Prudential Regulatory Authority’s (APRA) opinion that it is impossible to prevent all bank failures. Therefore, with the Special Resolution Regime contained in the Banking Act 2009, the PRA’s role is to minimise the systemic effect of any bank failure. The PRA’s supervisory style is based on judgement; risks; forward-looking and early intervention. This is very similar to APRA’s. PRA’s risk assessment framework and its supervisory responses based on the Proactive Intervention Framework. Yet, there are differences between the prudential regulatory and supervisory systems between Australia and the UK. The UK legislative framework is more complex than the Australian framework. Further, the PRA has policy setting powers although the vertical integration of financial regulation at European level may suggest that the PRA is unlikely to exercise this power very often. APRA on the other hand, does not have such wide policy setting powers. The UK Risk Assessment Framework takes more mitigating factors into account. Its Proactive Intervention Framework has five stages and early intervention is clearly a priority for the PRA, since it can start planning for resolution of an organisation even at stage 1. This is in contrast to the Australian SOARS methodology, where there are only four stages and resolution of an organisation takes place in the later stages. There are fears that the new structure within the Bank of England will make it a super single regulator. The thesis will compare the ‘twin-peaks’ model with the German regulatory structure since there are similarities in the sharing of supervisory responsibilities between the UK and German models. The thesis will then make several recommendations on how this concentration of power can be addressed.

This thesis comprises three papers which all examine commodity derivative markets and have a particular focus on commodity futures markets. The first paper examines market efficiency in metal, agricultural, financial and energy futures markets across different maturities. In the long-run, we found all markets to be efficient. And in the short-run, inefficiencies are found in the metal and energy future markets but not in the agricultural and financial markets. Moreover, results from a quantitative measure of short-run inefficiency indicate that all markets studied are at least 90% efficient along the futures curve for a 30-day forecast horizon. When the forecast horizon increases to 60-days, the efficiency measure drops to 50% in all the metal and energy futures markets, but not in the agricultural and financial markets. These findings indicate that the structure of markets and the forecast horizon are important factors to consider when assessing market efficiency. The second paper analyses the diversification benefits brought into traditional stock portfolios by adding commodities such as WTI Crude Oil, Copper or Soya Bean futures. Adopting a commodity futures curves perspective, we found that commodities are still useful in portfolio diversification even after the recent increase in the correlation between returns of commodities and equities. Moreover, we found that investors would be better off using a constant-distant maturity futures contract as it has higher return accompanied with lower volatility in comparison to a short-maturity futures contract. The constant-distant maturity also brings more benefit than a traditional buy and hold long-maturity futures contract does. Furthermore, we found the constant-distant maturity Copper futures to be the best among all the commodities that we studied regarding the diversification benefit during the financial turmoil period. The third paper examines the determinants of volatility along WTI Crude Oil futures curves. We analyse the effect of inventory, trading volume, open interest and speculative activities on the volatility of futures with different maturities. We find that trading volume has a positive relationship with volatility and open interest has a negative relationship with volatility. The inventory is found to have a negative relationship with volatility of up to 6-month maturity; while a positive relationship emerges for futures contracts with 12 and 18-month maturity. Speculative activities are found to be partially responsible for the high volatility in the post-crisis period.

This thesis focuses on the dynamics of currency premia. Specifically, we study the time-series and cross-sectional variation of currency carry trade and momentum strategies. In the first chapter, we study the role of domestic and global factors on payoffs of portfolios built to mimic carry, dollar carry and momentum strategies. We construct domestic and global factors from a large dataset of macroeconomic and financial variables and find that global equity market factors render strong predictive power for carry trade returns, while U.S. inflation and consumption variables drive dollar carry trade payoffs and momentum returns are driven by U.S. inflation factors. In addition, global factors can capture the countercyclical nature of currency premia. We also find evidence of predictability in the exchange rate component of each strategy and demonstrate strong economic value to a risk-averse investor with mean-variance preferences. In the second chapter, we propose a measure of global political risk relative to U.S. that captures unexpected political conditions. Global political risk is priced in the cross-section of currency momentum and it contains information beyond other risk factors. Our results are robust after controlling for transaction costs, reversals and alternative limits to arbitrage. The global political environment affects the profitability of the momentum strategy in the foreign exchange market; investors following such strategies are compensated for the exposure to the global political risk of those currencies they hold, i.e., the past winners, and exploit the lower returns of loser portfolios. In the third chapter, we identify a unique dimension of currency carry trades that it is related to the intensity of technology transition across countries. Particularly, we show that technology diffusion is a fundamental determinant of currency premia and it is priced in the cross-section of currency excess returns. We define a novel risk factor that captures the cross-country diffusion of technology. Investment currencies load positively on the global technology diffusion factor while funding currencies load negatively. Intuitively, we show that carry traders require a risk premium for financing risky innovation in countries with low technology diffusion.

This thesis aims to explore stock liquidity, a crucial attribute of financial assets, in US market. In particular, this research attempts to address a number of issues in the theoretical study of liquidity, some of which even still matters for debate. The empirical results in Chapter 3 suggest that the significance of liquidity on asset returns is time specific, in other words, the heterogeneity between liquidity components exhibits a Business Cycle effect. In particular, the liquidity risk premium is strengthened during downturns of the market conditions, as the association between the asset liquidity and return in the cross-sectional dimension is relatively stronger in the period of lower market liquidity. Besides, the analysis is carried out that focuses on the interrelationship between the market-wide liquidity components and the market dynamics, and some interesting Granger causality relationship is detected. Specifically, price impact components are Granger caused by transaction costs and trading activity, but do not Granger cause trading activity. Moreover, the Granger causality detected in this section also explains that market past performance is caused by liquidity, especially the dimensions of trading activity and price impact, and subsequently, the market-wide trading activity affects the market portfolio most recent and further performance. These findings for liquidity measures in this comparative analysis establish a significant step towards the understanding of liquidity measures in a more systematic and consistent setting, and can be a good starting point for constructing more robust liquidity measures. Based on a negative relationship between volatility of liquidity and asset returns, Chapter 4 extends this finding and provides a comparative analysis of the volatility of liquidity risk through an asset pricing framework considering several dimensions of liquidity, such as transaction cost, trading activity and price impact. The empirical findings, consistent with the literature, provide evidence of heterogeneity across various liquidity components and volatility specifications. In addition, by extracting the commonality of volatility of liquidity across individual assets via principal component analysis, the systematic components of volatility of liquidity are examined accordingly. Finally, a mimicking portfolio is constructed and used to track the systematic risk of volatility of liquidity, providing evidences that the latter is priced in asset returns. Chapter 5 studies the impact of market-wide liquidity volatility on momentum profit. It is examined by investigating whether the volatility of market liquidity dominates the market liquidity level in terms of affecting and predicting the momentum profit. Besides, it is determined that the impact is state-dependent; in particular, the impact of the fluctuation of the market liquidity on the momentum payoff is stronger when the market volatility or the illiquidity is higher. Finally, by a closer inspection of the momentum crash event in 2009, it is observed that the volatility of market liquidity increases sharply a couple of months before the crash, while stays stable during and after the crash. This thesis provides implications for investment perspective in terms of the trading strategies based on liquidity as well as momentum. For instance, the performance of the liquidity measurement is time-varying associated with market conditions. Moreover, the fluctuation of market liquidity, i.e., the volatility of liquidity, should also be considered for pricing issues. The empirical results suggest that the asset, of which the liquidity fluctuates heavily, usually has lower returns; this indication applies to six popular liquidity measures according to the empirical results. More importantly, investors could make profits by reversing the momentum trading strategy in momentum crash periods.

Copula theory is particularly useful for modeling multivariate distributions as it allows us to decompose a joint distribution into marginal distributions and a copula. Copula-based models have been widely applied in finance, insurance, macroeconomics, microeconomics and many other areas in recent years. This doctoral thesis particularly pays attention to applications of copula theory in quantitative risk management. The first chapter of this thesis provides a comprehensive review of recent developments of copula models and some important applications in the large and growing finance and economics literature. The first part of this chapter briefly introduces the definition and properties of copulas as well as several related concepts. The second part reviews estimation and inference methods, goodness-of-fit tests and model selection tests for copula models considered in the literature. The third part provides an exhaustive review of the extensive literature of copula-based models in finance and economics. Finally, an interesting topic for further research is suggested. The remaining three chapters investigate applications of copula theory in three topics: market risk prediction, portfolio optimization and credit risk estimation. Chapter Two investigates the dynamic and asymmetric dependence structure between equity portfolios from the US and UK. We demonstrate the statistical significance of dynamic asymmetric copula models in modeling and forecasting market risk. First, we construct ``high-minus-low" equity portfolios sorted on beta, coskewness, and cokurtosis. We find substantial evidence of dynamic and asymmetric dependence between characteristic-sorted portfolios. Second, we consider a dynamic asymmetric copula model by combining the generalized hyperbolic skewed t copula with the generalized autoregressive score (GAS) model to capture both the multivariate non-normality and the dynamic and asymmetric dependence between equity portfolios. We demonstrate the usefulness of this model by evaluating the forecasting performance of Value-at-Risk and Expected Shortfall for high-minus-low portfolios. From backtesting, we find consistent and robust evidence that our dynamic asymmetric copula model provides the most accurate forecasts, indicating the importance of incorporating the dynamic and asymmetric dependence structure in risk management. Chapter Three investigates the dependence between equity and currency in international financial markets and explores its economic importance in portfolio allocation. First, we find striking evidence for the existence of time-varying and asymmetric dependence between equity and currency. Second, we offer a methodological contribution. A novel time-varying skewed t copula (TVAC) model is proposed to accommodate non-Gaussian features in univariate time series as well as the dynamic and asymmetric dependence in multivariate time series. The multivariate asymmetry is captured by the skewed t copula derived from the mutlivariate skewed t distribution in Bauwens and Laurent (2005) and the time-varying dependence is captured by the GAS dynamics proposed by Creal et al. (2013). This model can be easily generalized from the bivariate case to the multivariate case. Third, we show that findings of dynamic and asymmetric dependence between equity and currency have important implications for risk management and asset allocation in international financial markets. Our empirical results show the statistical significance of the TVAC model in risk management and its economic values in real-time investment. Chapter Four studies the credit risk of UK top-tier banks. We document asymmetric and time-varying features of dependence between the credit risk of UK top tier banks using a new CDS dataset. The market-implied probability of default for individual banks is derived from observed market quotes of CDS. The default dependence between banks is modeled by a novel dynamic asymmetric copula framework. We show that all the empirical features of CDS spreads, such as heavy-tailedness, skewness, time-varying volatility, multivariate asymmetries and dynamic dependence, can be captured well by our model. Given the marginal default probability and estimated copula model, we compute the joint and conditional probability of default of UK banks by applying a fast simulation algorithm. Comparing our model with traditional copula models, we find that the traditional models may underestimate the joint credit risk most of the time, especially during a crisis. Furthermore, we perform an extensive regression analysis and find solid evidence that time-varying tail dependence between CDS spreads of UK banks contains useful information to explain and predict their joint and conditional default probabilities. Chapter Five concludes with recommendations for further study.

According to the significance of the econometric models in foreign exchange market, the purpose of this research is to give a closer examination on some important issues in this area. The research covers exchange rate pass-through into import prices, liquidity risk and expected returns in the currency market, and the common risk factors in currency markets. Firstly, with the significant of the exchange rate pass-through in financial economics, the first empirical chapter studies on the degree of exchange rate pass-through into import in emerging economies and developed countries in panel evidences for comparison covering the time period of 1970-2009. The pooled mean group estimation (PMGE) is used for the estimation to investigate the short run coefficients and error variance. In general, the results present that the import prices are affected positively, though incompletely, by the exchange rate. Secondly, the following study addresses the question whether there is a relationship between cross-sectional differences in foreign exchange returns and the sensitivities of the returns to fluctuations in liquidity, known as liquidity beta, by using a unique dataset of weekly order flow. Finally, the last study is in keeping with the study of Lustig, Roussanov and Verdelhan (2011), which shows that the large co-movement among exchange rates of different currencies can explain a risk-based view of exchange rate determination. The exploration on identifying a slope factor in exchange rate changes is brought up. The study initially constructs monthly portfolios of currencies, which are sorted on the basis of their forward discounts. The lowest interest rate currencies are contained in the first portfolio and the highest interest rate currencies are in the last. The results performs that portfolios with higher forward discounts incline to contain higher real interest rates in overall by considering the first portfolio and the last portfolio though the fluctuation occurs.

This thesis examines the emergence of risk oversight since the global financial crisis, considering how different actors construct the idea of oversight and examining multi-level accountabilities that make it an organisational reality. The practice of oversight is assessed by 61 interviews and 17 weeks of field immersion in major financial institutions in London. The research questions are: ‘How does the practice of risk oversight differ from management?’, ‘How has the concept of oversight evolved?’, ‘Where exactly within financial organisations does risk oversight happen?’, and ‘How do Risk Committee members operationalise their risk oversight role?’ Tentative conclusions are also drawn on the extent to which enhancements in risk oversight since the crisis have strengthened financial institutions’ ability to manage risk. The first empirical chapter considers the evolution of regulatory attitudes to risk oversight before and after the financial crisis, and discusses the changing role of non-executives. The second empirical chapter on board risk committees discusses their accountability and relationships, both within and outside the firm. It shows board risk committee members to be an important part of the fabric of oversight who are still ‘feeling their way’ towards a stable definition of their roles and functions. The third empirical chapter discusses how oversight is organised within financial institutions. This is now commonly done through the ‘Three Lines of Defence’ framework. This is an idealised framework for risk governance that delineates how three layers of risk involvement (production, risk management and internal audit) are differentiated and also defined by their relations of oversight to each other. The last chapter discusses information intermediaries: the people within firms who create information flows within the oversight structures. Information is at the core of any oversight practice and this chapter shows that providing it to risk overseers, accurately and comprehensively, is a continuous struggle for the various parties involved.

The dissertation, which consists of three chapters, is devoted to exploring theoretical asset pricing in over-the-counter markets. In Chapter 1, I study an economy where investors can trade a long-lived asset in both exchange and OTC market. Exchange means high immediacy and high cost while OTC market corresponds to low immediacy and low cost. Investors with urgent trading needs enter the exchange while investors with medium valuations enter the OTC market. As search friction decreases, more investors enter the OTC market, the bid-ask spread narrows and the trading volume in the OTC market increases. This sheds some light on the historical pattern why most trading in corporate and municipal bonds on the NYSE migrated to OTC markets after WWII with the development of communication technology. In Chapter 2 (co-authored with Hongjun Yan and Hin Wei), we analyse a search model where an intermediary sector emerges endogenously and trades are conducted through intermediation chains. We show that the chain length and the price dispersion among inter-dealer trades are decreasing in search cost, search speed and market size, but increasing in investors’ trading needs. Using data from the U.S. corporate bond market, we find evidence broadly consistent with these predictions. Moreover, as the search speed goes to infinity, our searchmarket equilibrium does not always converge to the centralized-market equilibrium. In particular, the trading volume explodes when the search cost approaches zero. In Chapter 3 (co-authored with Hongjun Yan), we analyse a search model where two assets with different level of liquidity and safety are traded. We find that the marginal investor’s preference for safety and liquidity is not enough to determine the premium in equilibrium, but the whole distribution of investors’ valuations play an important role. We specify the condition under which an increase in the supply of the liquid asset may increase or decrease the liquidity premium. The paper also endogenizes the investment in the search technology and conducts welfare analysis. We find that investors may over- or underinvest in the search technology relative to a central planner.

International trade is a key driver of development. This thesis contains three chapters concerned with the challenges of, and opportunities for, expanding international trade in developing countries. The first chapter, “Growth Spillovers and Market Access in Africa”, shows that because of increased trade, African countries benefit from the growth of their neighbours. In particular, growth in neighbouring countries increases the size of accessible markets, boosting export demand for local goods. Over the period 1992-2012, this expansion of markets increased domestic growth rates by over 2 percent per year on average. By reducing trade costs, countries can further increase these positive growth spillovers. The second chapter, “Bad Neighbours as Obstacles to Trade: Evidence from African Civil Wars”, considers how the trade of landlocked African countries is affected by neighbouring civil wars. The paper shows that such civil wars increase transport costs and subsequently reduce the international trade of landlocked countries. Calibrating the regression results, I estimate that landlocked trade could have been around 12 percent higher over the period 1975-2005 in the absence of neighbouring civil wars. The final chapter, “Regulation, Renegotiation and Capital Structure: Theory and Evidence from Latin American Transport Concessions”, is joint work with Stephane Straub and Jean-Jacques Dethier. Large transport projects in developing countries are now often delivered through private concessions, and we analyse the financing of such projects. A common argument is that firms use leverage in order to influence regulatory outcomes. Intuitively, firms can extract higher prices by increasing leverage if regulators fear project collapse. We show that under price cap regulation, this mechanism is weakened because prices are less responsive to costs. Consistent with the theory, we find evidence that infrastructure firms in Latin America use less debt when regulated through price cap.

This thesis is concerned with the influence of campaign finance on the interplay between political power and electoral competition in the United States and the United Kingdom. The thesis considers both the donation and expenditure sides of campaign finance: In the context of U.S. state and federal legislative elections (1980-2014), I study how political power affects the allocation of campaign contributions, and in the context of U.K. House of Commons elections (1885-2010), I examine how campaign spending restrictions affect political power via electoral behavior. The three papers which make up the construct of the thesis answer the following questions: (i) What is the financial value of incumbency status, and who generates it? (ii) Who values legislative agenda setters, and why do they do so? (iii) What are the electoral consequences of statutory limits on campaign expenditure? I argue that campaign donors make their contributions to powerful politicians in exchange for access to the policy-making process, and that the power of these politicians is sustained, at least in part, due to these contributions. In the first paper, I document that U.S. incumbent legislators enjoy sizeable financial advantages compared to challengers, and I demonstrate that this advantage is the result of donations from access-seeking industries. In the second paper, I show that U.S. legislators who are institutionally endowed with agenda-setting powers are given special treatment by campaign donors. I document that donors with vested economic interests in regulatory policy place great value on agenda-setting legislators – in particular when institutions provide these legislators with the authority to block new legislation. In the final paper, I study the consequences of campaign spending limits in the context of U.K. House of Commons elections. I show that unrestrained spending reduces electoral competition, promotes professionalized campaigns, and benefits incumbents and centerright parties.