The Originate-to-distribute (OTD) model allows banks to sell or securitize loans rather than holding them until maturity. We investigate the incentives for using OTD lending and its impact on credit supply and bank risk taking behavior based on their involvements in the OTD model and bank size. Banks involved into OTD lending have more OTD loans and riskier mortgage portfolios. Funding cost reduction and liquidity needs are more important for high-OTD banks and small banks and regulatory capital arbitrage can only be found in small banks. Moreover, we find that OTD lending increase credit supply, but it has adverse effect on bank risk, especially for small banks involved in the model.

In this thesis, we tackle the question of how newly available public information is absorbed in the FX market. The existing literature uses a standardized news transformation on macroeconomic data before using it in time-series models, due to a link between the transformation and the rational expectations hypothesis. Our results challenge a de facto approach by highlighting that the choice of the news transformation has a significant effect on the results. In addition, we propose several methodological improvements to the popular time-series approach. However, combining low frequency macroeconomic indicators and high-frequency FX processes in time-series models creates an ill-structured problem. To shed new light on the popular existing methodology, we propose an innovative way of restructuring the problem so that less restrictive methods - such as scaling laws, dominance testing and probability metrics - can be applied. Our results show weak evidence for a widely reported observation that new information causes elevated levels of volatility in FX markets, and in fact the reverse is observed in some cases. Further investigation reveals that the only significant factor driving FX news shocks is an anticipation effect of the news release. Once we account for the anticipation effect, we observe that most releases have positive influence irrespective of the sign of the data indicator released.

This thesis extends the empirical asset pricing literature by testing whether alternative specifications of Fama and French’s (1993) three-factor and Carhart’s (1997) four-factor models capture size, value and momentum anomalies. Specifically, the alternative models tested include the modified and index-based models of Cremers et al. (2013) and decomposed models of Fama and French (2012). This thesis investigates international stock returns and whether asset pricing models are integrated across four countries, namely the US, UK, Japan, and Canada. Finally, the information content of the empirically motivated size, value and momentum factors is tested using Petkova’s (2006) ICAPM model. The models are tested using both time-series and cross-sectional regression approaches. The results show that the factors constructed using different approaches have quite different average returns. In general, there is no size premium in average stock returns in any country. There is a value premium only for Japan and Canada that increases with size, while there is a momentum premium everywhere except Japan, which declines with size. Both timeseries and cross-sectional results show that the alternative models significantly improve the pricing performance, and especially the index-based model successfully explains the size and B/M portfolio returns for the four countries. None of the models can explain the size and momentum portfolio returns except for Japan. Although the international index-based model receives some empirical support in a combined international sample, the US and Japan, generally, the international models fail badly, which indicates a lack of integration. When relating size, value and momentum factors with innovations to the state variables in an ICAPM specification, the results are discouraging and contradict Petkova’s (2006) results for the US. The size, value and momentum factors remain important factors in explaining the crosssectional returns for all countries, even in the presence of the state variable innovations.

In response to the spectacular financial reporting failures in Western economies in the early 21st century, the UK has undergone a series of regulatory reforms and the Ethical Standards (ES) by the Auditing Practices Board (APB) are among the most prominent. While the issues of joint provision of audit and non-audit services (NAS) and long audit firm tenure died down following the enactment of ES in 2004, they attracted comments from regulators and policymakers in the wake of the 2007-09 financial crisis. This makes such joint provision and extended tenure long-standing, potentially unresolved issues even in a changed regulatory setting. In this context, the current study has been motivated to investigate the impact of NAS and audit firm tenure regulations on de facto auditor independence and financial reporting quality (FRQ) of FTSE350 companies. Using estimates of discretionary accruals and measures for auditors‟ economic dependence, the study finds little support against popular arguments that NAS fees and long audit firm tenure erode FRQ. Out of two measures of auditors‟ economic dependence, „total fees to auditors‟ is documented to be significantly negatively associated with discretionary accruals during the post-APB ES period. The „differencein- differences‟ method provides some evidence at a marginally significant level for ES‟s causal impact in improving FRQ during post-APB ES period, ceteris paribus. Tests of association between audit firm tenure and FRQ suggest, with a caveat of marginally significant results, that audits conducted during the post-APB ES period have a mitigating effect on discretionary accruals and that longer audit firm tenure does not compromise auditor independence but in fact helps to improve FRQ in the form of lower discretionary accruals. These empirical findings have weak support for policymakers‟ views that an outright prohibition on supplying NAS for audit clients and mandating more frequent rotation of auditors would help to improve FRQ. Results from the final set of tests suggest a marginally significant negative association between audit firm tenure and discretionary accruals for companies audited by Big4 auditors but not for those audited by their non-Big4 counterparts. This provides insight to the most recent regulatory concerns about the concentrated audit market with Big4 domination. The study, therefore, makes important empirical contributions with policy implications.

The first essay (Chapter 2) investigates debt-financed share repurchases. We find that debt-financed share buybacks generate positive short-term and long-run abnormal stock returns. Leveraged buyback firms have more debt capacity and lower growth prospects ex ante, increase leverage and reduce investments more sharply ex post than cash-financed buyback firms. Firms that are over-levered ex-ante are associated with lower returns and real investments following leveraged buybacks. The lower announcement returns are concentrated on firms with weaker corporate governance. Leveraged buybacks also have lower completion rates than cashfinanced buybacks. The evidence is consistent with leveraged buybacks enabling firms to optimize their leverage, on average benefiting shareholders. The benefits decrease with a firm’s leverage ex ante. The second essay (Chapter 3) studies the effect of the Supreme Court landmark Citizens United decision on how firms adjust their political activism under the constraints imposed on them by institutional investors. The essay shows that firms with more political connections have lower announcement returns, which are concentrated in firms with high institutional ownership. Furthermore, firms headquartered in states with corporate campaign contribution bans before Citizens United have relatively fewer state political connections afterwards. This result is concentrated in firms with low institutional ownership. The evidence is consistent with institutional investors’ preference to not use the new avenue of political activism. The third essay (Chapter 4) tests the dividend catering theory proposed by Baker and Wurgler (2004b) by using the Internet search volume for dividend-related keywords as a direct measure of investors’ dividend sentiment. We find that firms initiate or increase dividends when the dividend sentiment is stronger. These effects are concentrated on firms located in high dividend sentiment states. They are robust after controlling for firm characteristics, risk, and the dividend premium. Our results are consistent with managers catering to investor’s time-varying demand for dividendpaying stocks.

The first essay (Chapter 2) examines how investors behave in parallel markets that trade the same asset but have different degrees of transparency level. Using data from the Taiwan Security Borrowing and Lending market, we find that short sellers with private information prefer to trade in the opaque market, with momentum and risk-bearing trading strategies prefer to trade in the semi-transparent market, and with urgent liquidity needs (such as short-squeezed short sellers) prefer to trade in the transparent market. We show that transactions in both transparent and opaque markets contain information and provide liquidity. Our results indicate that parallel markets complement each other by serving different types of investors. The second essay (Chapter 3) shows that the presence of security lending supply before an initial public offering (IPO) reduces the initial stock return following IPO and improves the subsequent long-run performance. We use a sample of British firms that went public via a two-stage IPO procedure where a firm becomes publicly traded on the London Stock Exchange in the first stage, and offers new shares to the public in the second stage. Stocks are lendable before the new equity issuance which relaxes the short sale constraints that investors typically face in a conventional IPO. We find that twostage offerings with higher security lending supply before offering are associated with lower IPO underpricing and better long-run performance. Our results are consistent with the conjecture that short selling improves the pricing efficiency of the IPO market. The third essay (Chapter 4) examines the effect of short sellers as arbitrageurs on market liquidity in cases of toxic and non-toxic arbitrage opportunities. Arbitrage opportunities can be toxic when the prices of an asset-pair adjust to information at different speeds. In this case, market makers increase spread to avoid being picked off by informed arbitrageurs. Using price-parity deviations of Canadian stocks cross-listed in the U.S. market as arbitrage opportunities identifiers, we document that short arbitrageurs provide liquidity to the market in general, but impair liquidity in cases of toxic relative to non-toxic arbitrage opportunities. We also show that the liquidity impairment effect of short arbitrageurs is stronger when limits to arbitrage are high.

This thesis consists of three papers in the area of empirical finance. Chapter 2 investigates the role of realized jumps detected from high frequency data in predicting future volatility from both statistical and economic perspectives. We show that separating jumps from diffusion improves volatility forecasting both in-sample and out-of-sample. Moreover, we show that these statistical improvements can be translated into economic value. We find a risk-averse investor can significantly improve her portfolio performance by incorporating realized jumps into a volatility timing based portfolio strategy. Chapter 3 investigates the use of high frequency data in large dimensional portfolio allocation. We consider the use of high frequency data beyond the estimation of the realized covariance matrix. Portfolio strategies using high frequency data in measuring and forecasting univariate realized volatility can generate statistically significant and economically tangible benefits compared to low frequency strategies. Moreover, using high frequency data to separate realized volatility into different components and construct realized higher moments can also enhance portfolio performance. Strategies using upside and downside volatility components and using realized skewness can deliver incremental economic benefits over the strategy using total realized volatility alone. Chapter 4 investigates the pricing of volatility risks in currency markets. Firstly, we show that pricing volatility risk can be understood by pricing some of its components. We find that diffusive volatility dominates jump volatility in pricing carry trade returns, while jump volatility is important to explain the joint cross-section of carry trade and momentum returns. Both short run and long run components are priced, and the short run component is more important in general. Secondly, we suggest that factors similar to volatility in identifying bad states, i.e. volatility of volatility and cross sectional volatility are also priced in currency returns and they cannot be fully subsumed by conventional volatility risks.

No description available.

This thesis consists of three self-contained chapters. The first two chapters are concerned with the same overall topic though, namely exchange rate determination in Emerging Economies (EMEs), while the third chapter is related to the dynamics of capital flows in EMEs. The first chapter studies the impact of monetary policy announcements on the exchange rate behaviour in EMEs under Inflation Targeting (IT), focusing on the case of Colombia, Chile and Brazil. I address two specific issues. First, I analyze if the pattern of exchange rate returns and its volatility behave differently on days when the Central Bank makes interest rate announcements. Second, I investigate whether the adoption of IT has produced a systematic change in the effect of these announcements on the exchange rate. Using daily data, the results provide evidence that there are significant differences in the conditional volatility of exchange rate returns on days when interest rate announcements surprise the market. The results indicate that the effects of surprise announcements on the exchange rate volatility have been diminished due to the adoption of IT and is related to the systematic change in market expectations. The second chapter studies the effectiveness of foreign exchange intervention in Brazil, Chile, Colombia, Mexico, and Peru. I use the coordination channel approach of exchange rate behaviour where exchange rates are determined in an environment of order flow from informed and uninformed traders. The empirical approach of this theoretical model is based on a Smooth Transition Regression GARCH-M (STRGARCH-M) model where the confidence of traders in the fundamentals depends on exchange rate misalignments and central bank intervention that increases traders’ confidence and strengthen the degree of exchange rate mean reversion. Unlike the existent literature on this channel of intervention, I include a measure of risk premium in the conditional mean equation of exchange rate returns that is consistent with the idea that the rejection of the risk-neutral efficient market hypothesis may be the result of a time-varying risk premia. Using daily data from 2000 to 2013, the results suggest that foreign exchange intervention has been effective via the coordination channel, and the risk premia decreases the pace of depreciation as risk averse investors demand a higher rate of return from holding the domestic currency. The recent literature on capital flows has tried to find evidence regarding the post-crisis increase of capital inflows in EMEs due to Fed Unconventional Monetary Policies (UMP). In the third chapter, I address this open question analyzing if the effect of these policies on capital flows in EMEs depends on the degree of financial exposure of each country to the US. This approach could be the smoking gun in this debate as I attempt to find evidence of a specific mechanism by which these policies could affect the pattern of capital flows. I estimate a dynamic panel data model with country fixed effects using quarterly data on gross private capital inflows for 46 EMEs from 2000:Q1 to 2013:Q2. The results suggest that UMP have a significant effect on capital flows that depends on the type of unconventional measure examined and it is bigger if countries have a higher financial exposure to the US.

A growing body of empirical literature has attempted to measure the efficiency of banking sector using Data Envelopment Analysis (DEA) by focusing on different aspects of banking services. However, standard DEA models often fail to sufficiently discriminate between efficiency scores of banks particularly with small sample size. Moreover, sometimes knowledge about different banking operations is available that needs to be incorporated in the evaluation method to assess their impact on the performance of banks. This research deals with the efficiency evaluation of banking sector through DEA based on additional information about multiple banking operations without which efficiency is generally overestimated. The main objective of this thesis is to develop a better informed DEA model that is capable of incorporating additional information about different bank specific characteristics by overcoming the problem of poor discrimination. For this purpose, the current study has proposed a novel methodological integration of DEA with production trade-offs in banking context and named it “DEATOB Framework”. This framework is universal in nature and can be applied to banking sectors of other countries. The study also aims to provide the empirical application of DEATOB Framework for which a sample of 29 commercial banks of Pakistan is selected. The results indicate that this framework evaluates banks on the basis of additional characteristics and provides better discrimination between good and bad performers as compared to the standard DEA model. The final objective is to extend the proposed framework to other banking models. For this purpose, the profitability model is chosen considering the profit maximization goal of banks and a separate PDEATOB Framework is developed. An empirical application of this framework is also provided to demonstrate its workability. This thesis also provides an insight on scale efficiency and relationship of efficiency with the banks size and ownership after application of the proposed frameworks.