We consider two inverse problems motivated by questions in mathematical finance. In the first two chapters (Part 1) we recover processes consistent with given perpetual American option prices. In the third and fourth chapters (Part 2) we construct model-independent bounds for prices of contracts based on the realized variance of an asset price process. The two parts are linked by the question of how to recover information about asset price dynamics from option prices: in part one we assume knowledge of perpetual American option prices while in the second part we will assume knowledge of European call and put option prices. Mathematically, the first part of the thesis presents a framework for constructing generalised diffusions consistent with optimal stopping values. The second part aims at constructing bounds for path-dependent functionals of martingales given their terminal distribution.

This thesis contains the findings of an examination of the relationship between internal corporate governance structures and the financial performance of South African listed firms. Specifically, using a sample of 100 South African listed firms from 2002 to 2006 (a total of 500 firm-year observations) and corporate governance data collected directly from company annual reports, the thesis seeks to ascertain whether better-governed listed firms tend to be associated with higher financial returns than their poorly-governed counterparts. Unlike prior studies, the internal corporate governance-financial performance nexus is investigated by applying both the compliance-index and equilibrium-variable research methodologies. The results based on the compliance-index model suggest that there is a statistically significant and positive association between the quality of the sampled firms’ internal corporate governance structures and their financial performance. This finding is robust whether an accounting (return on assets) or a market (Tobin’s Q) based measure of financial performance is used. Distinct from prior studies, an analysis of the impact of complying with the South African context specific affirmative action and stakeholder corporate governance provisions on the financial performance of South African listed firms is also investigated. The results indicate that compliance with the affirmative action and stakeholder corporate governance provisions impacts positively on the performance of South African listed firms. By contrast, the results based on the equilibrium-variable model are generally mixed. First, regardless of the financial performance measure used, board diversity, the frequency of board meetings, and the establishment of board committees except the presence of a nomination committee seem to have no impact on firm financial performance. Second, board size is statistically significant and positively associated with Tobin’s Q (Q-ratio), but statistically insignificant and negatively related to return on assets (ROA). Third, role or CEO duality is statistically significant and positively related to ROA, but statistically insignificant and negatively associated with the Q-ratio. Director shareownership is statistically insignificant and positively related to ROA, but statistically significant and negatively associated with the Q-ratio. Finally, the findings based on both the director shareownership squared and cubed do not support the statistically significant non-linear director shareownership-financial performance association reported by Morck et al. (1988). The findings from a series of robustness or sensitivity analyses carried out suggest that the empirical results reported are generally robust to potential endogeneity problems.

The thesis is aimed at investigating the implications of globalization for the conduct of monetary policy. By globalization we mean increased interdependence of national economies as reflected in greater and freer flow of goods, services, capital, and labour across national borders. In particular, our research addresses a number of important issues in the recent monetary policy and globalization debate. First, are global factors becoming important drivers of domestic inflation? Second, are global factors playing more powerful role on inflation dynamics in the sectors of an economy that are more open to trade? Third, has globalization made the job of Central Bankers more difficult? And finally, do the Central Bankers in the United States and the United Kingdom consider international factors too along with domestic factors while determining the short term interest rates? Inflation rates have been observed to be low across industrial countries since the early 1990s. The co-movements of inflation rates across countries are strikingly high. We model the co-movements of inflation rates by a global factor, regional factors and idiosyncratic component. In particular, we estimate a Dynamic Factor Model with Stochastic Volatility and find that the contribution of the global factor has increased over time in explaining the variance of inflation in OECD countries. The regional factor also gains importance in countries with strong intra-regional economic linkages potentially due to proliferation of regional trade agreements and common currency areas. In the European countries, the role of global and regional factor together dominates the country specific factor since the late 1990s. The volatility of inflation has substantially decreased over time and our modelling framework incorporates time varying volatility of inflation. We find strong positive and significant relationship between the international common factor and economic globalization. Consistent with inflation becoming a global phenomenon, co-movements of aggregate inflation between countries are observed to be high. We examine whether this is also the case for sectoral inflation, we model the co-movements in sectoral inflation as being associated with a global factor, a sector specific factor and an idiosyncratic error term. We find that the co-movements of inflation of tradable sectors are substantially greater than the co-movements in non-tradable sectors which implies that the greater co-movements of inflation can be attributed to increased trade global integration of product markets. To test this, we attempt to find empirical relationship between the estimated common factor in sectors and openness to trade measured as import penetration. A positive relationship is found between the estimated sector specific common factors and import penetration. Given our earlier chapters identify important global dimension to aggregate and sectoral inflation, does this matter for monetary policy? The implication of globalization for monetary policy in the United States and the United Kingdom are examined by estimating monetary policy reaction function for these advanced economies over the sample period 1985-2010. We also consider time variations in these reaction function by estimating over a sub-sample of 1992-2010 for the United Kingdom and the Greenspan-Bernanke Era for the United States. We estimate the policy reaction function with domestic and global inflation and output gaps and with the component of domestic inflation and output gap that is not related to global variations. The policy reaction function augmented with foreign variables such as real effective exchange rate and foreign interest rate is also estimated. We use measures of inflation based on GDP deflator, CPI and inflation expectations. We find that the Federal Reserve responds to global inflation only in the full sample and to global as well as the country specific inflation in the second sub-sample (Greenspan-Bernanke Era). This may imply strong commitment of the Federal Reserve to the goal of ``price stability'' during Greenspan-Bernanke Era. The Bank of England responds to global inflation along with the country specific inflation. The international factors such as the real effective exchange rate changes (depreciation) and foreign interest rates have significant and positive effect on policy rates.

This research investigates the long-run equilibrium relationship between money demand and its determinants in China over the period 1952-2004 for three definitions of money – currency in circulation m0, narrow money m1 and broad money m2. The appropriate dummy variable has been added into the functions to assess and evaluate effects of economic reform in China. The additional influences on money demand in China, such as wages, monetization process and saving effects are explored. The real wage index w, the ratio of urban population to total population ROP, the ratio of total deposit to currency DCR, and the ratio of total deposit to income RDG have been considered as additional variables in the same money demand functions. To test the stable long-run money demand functions, the Engle-Granger two-stage cointegration method (EGTS), Phillips-Hansen cointegration approach, Pesaran et al. (2001) ARDL cointegration procedure along with CUSUM and CUSUMSQ stability tests and Johansen Multivariate Cointegration procedures are employed. Granger Causality Test is applied to indicate either uni-directional or bi-directional causality exists in the variables. Wald tests for homogeneity and parameter constancy tests are employed in this study as well. The estimation results, especially the cointegration analyses show that the real money demand functions perform better than the nominal money demand functions. Narrow money demand m1 presents more satisfactory coefficients than the other two in terms of economic theory and econometric diagnostics. The stabilisation policy should primarily aim at the narrow money m1. This study reveals that the economic reform did bring significant changes to the Chinese economy. Income is shown to be the most important determinant of money demand. The other additional variables also have significant effects on the money demand. The wage index influence on money demand models is important. The raise of monetization process made the money play a more vital role. The impact of ratio of total deposit to income is significant.

The disclosure of Corporate Governance (CG) information by firms has been found in prior studies to have an impact on the market value of firms. This thesis extends the research by studying the impact of voluntary CG disclosure by firms in Hong Kong, a market which provides a strong legal investor protection but characterized by a high insider ownership, on company valuation, as proxied by Tobin’s q. This thesis also examines the role of dividend payout on the CG of Hong Kong firms. Based on hand-collected data for a sample of 258 firm-years over the 2003-2005 period, the empirical results show that, firstly, voluntary CG disclosure is positively and significantly related to market valuation for small firms, but the relationship is not significant for large or medium firms. Combining large firms and small firms in a pooled sample, as done in most previous studies, thus misses the differential value relevance of voluntary CG disclosure for small versus large firms. Secondly, firms with higher CG disclosure are associated with lower dividend payout ratios, ceteris paribus. The evidence appears to suggest that CG disclosure can substitute for dividend payout. Thirdly, those small firms with medium levels of insider ownership are found to pay lower dividends than small firms with either low or very high levels of insider ownership, suggesting that investors would expect higher dividends from small firms that are prone to, or have either agency problems or entrenchment problems. Furthermore, controlling for the level of insider ownership, a small firm with high CG disclosure is always associated with a higher market valuation. The empirical evidence suggests that voluntary CG disclosure has a much stronger impact on the reduction of information asymmetry between investors (i.e., the outsiders) and managers (i.e., the insiders) for small firms than for large firms. Hence, by voluntarily disclosing more CG information, a small firm can be expected to enjoy the double benefits of receiving a higher market valuation and a lower demand for dividend payout from investors. This study contributes to the research of value relevance of CG disclosure in several ways. It provides clear evidence that voluntary CG disclosure enhances the valuation of small firms, which previous research may have overlooked. It also shows that voluntary CG disclosure and the level of insider ownership jointly affect a firm’s valuation and dividend payout. Voluntary disclosure of corporate governance information, even under a strong legal regime for investor protection, seems to be a company attribute very much appreciated by outside investors.

Exchange Market Pressure refers to money market disequilibrium that arises due to non-zero excess demand for domestic currency in the foreign exchange market. Exchange rate changes reflect the extent of market pressure in the absence of Central Bank intervention. It is argued that nominal exchange rate changes have consequences for domestic macroeconomic variables. These include domestic output growth, increase in domestic prices, balance of trade, firms’ price-setting behaviour in high inflation countries, foreign debt burden of the country, balance of payments and the stability of the domestic financial system. It has been observed that the Central Banks generally intervene in the foreign exchange market to avoid these undesirable consequences of exchange rate changes. In this thesis, we construct exchange market pressure and intervention index for Pakistan using Weymark’s (1995) approach. The basic objective is to identify whether it is downward or upward pressure that has remained dominant over the entire sample period. Based on intervention index values, we evaluate the Central Bank’s monetary policy over the given sample period. In addition, we also calculate the actual exchange rate and predicted exchange rate using one period lagged exchange rate. We check whether monetary policy is successful in its objective of reducing exchange rate volatility. Finally, we also evaluate the determinants of exchange market pressure in a panel of ten countries. The first empirical chapter utilises difference data and the two-stage least square approach. In the second empirical chapter we adopt Johansen’s (1988) cointegration approach. Both of these provide evidence of downward pressure and active Central Bank intervention. Furthermore, these chapters show that the Central Bank’s foreign exchange intervention policy is fairly successful in achieving its objective of reducing exchange rate volatility. The initial empirical chapters use a fixed parameter approach. This has the disadvantage that it does not allow the estimated parameters to take account of structural changes. A third empirical chapter addresses this issue and uses the Kalman Filter Time Varying Parameter approach. This has the advantage of allowing the parameters to take account of the effects of structural changes on parameter constancy. The results show unstable estimated parameters. The constructed exchange market pressure and intervention index show downward pressure and the active Central Bank intervention. Thus, this chapter further confirms our earlier findings of downward pressure and active Central Bank intervention. However, despite unstable estimated parameters, Central Bank intervention policy is successful in reducing exchange rate volatility which is unexpected. In the earlier empirical chapters, we assumed direct Central Bank intervention. However, there may be the case that Central Bank may use interest rate for fending off speculative attack. In such a case it is better to include interest rate as component of exchange market pressure to truly reflect the extent of foreign exchange market disequilibrium. Last empirical chapter overcomes this issue and uses Eichengreen et al. (1996) approach for constructing exchange market pressure. It consists of percent changes in exchange rate, relative interest rate differential and relative percent changes in foreign exchange reserves. Furthermore, in this chapter, we evaluate the determinants of exchange market pressure in a panel of ten countries. The results indicate the relevancy of some macroeconomic variables and measures of openness.

The exchange rate is one of the most vital components in any economic and investment decision. With the increase in globalisation, there is a concomitant increase in the exchange rate risk in any global investment decision. This Ph.D. thesis examines asset pricing in the foreign exchange market in various dimensions, introduces new techniques for performance measurement and information flow, and attempts to explain the carry trade in the foreign exchange market. The economic significance of empirical exchange rates models in a portfolio-based framework was examined, using a thirty-year time series of five exchange rates. The forecast performances were evaluated in mean-variance and performance index (indices of acceptability) to compare the fundamental exchange rate models with a benchmark random walk model. The parameters were computed using advanced computational finance and econometric techniques. The performance measurements obtained from mean-variance by various models were compared using the Sharpe ratio. It was concluded that the structural model, although unable to beat the random walk model, did not perform worse than the forecasts obtained from the benchmark model. The results from the indices of acceptability evaluation indicate that one-month ahead forecasts obtained from the monetary model of the exchange rate performed better than the benchmark model. Furthermore, the information flow in the foreign exchange market was examined by evaluating the relationship between volatility and the customers' trading activity. An attempt was made to explain the relationship between volatility and customer order flows in a portfolio-based framework with unique aggregate and disaggregate customer order-flow data from the Union Bank of Switzerland (UBS). This was the largest private dataset used to-date in a study of the foreign exchange market. The relationship was found to be robust; that is, the order flow is one of the main sources for transmitting private information to the foreign exchange market. This relationship holds across all the currencies and in various volatility estimates. This study is the first in the foreign exchange market in the aforementioned setup, and robustly elucidates the cited relationship in the foreign exchange market. The results give significant support to information being asymmetric across classes of customers and that private information is transmitted to the foreign exchange market by the trading behaviour of informed customers. Moreover, the volatility patterns in the foreign exchange market are significantly and substantially affected by the customer order flows. The size of the trade impact on volatility in a portfolio-based approach was also examined and it was found that the large sales are more influential trades on volatility in the foreign exchange market. In addition, to study the subsequent volatility, there was an examination of two existing hypotheses; i.e., the liquidity-driven-trade-hypothesis (positive subsequent relationship), and the information-driven-trade-hypothesis (negative subsequent relationship.) Both phenomena were found to exist, depending on the economic condition of the market. Finally, an explanation was given for the existence and identification of the carry trade in the foreign exchange market. When an investor borrows from a low interest-rate currency and invests in a higher interest-rate currency, zero-investment portfolio, this trading strategy is called carry trade strategy. Again, a novel data set provided by the UBS was examined to establish a relationship between the ordering patterns of informed customers and the carry trade. The forward discount bias and the carry trade were studied using theories of microstructure finance and the consumption-based asset-pricing model in a portfolio-based framework. The microstructure approach is the standard model of Evans and Lyons (2002). It was found that the order flow significantly explained the excess return in the carry trade, implying that informed customers knew about the carry trade opportunities in the market and reorganised their portfolios in order to realise these gains. Volatility and customer order flows were also examined, using a GMM approach, as a global innovation factor, and it was found that both variables significantly explained the cross-section of carry returns in the foreign exchange market.

This thesis aims to trace the development of management accounting systems (MAS) in a Portuguese bank, where an activity-based costing system (ABC) was trialled for implementation, as a means to improving the economy, efficiency and effectiveness of employee activity. The culture of banking in Portugal has changed significantly over the last 25 years, but at the same time there are older traditions which remain strong. The purpose of this research was to study how an imported MAS like ABC is developed and disseminated within a Portuguese banking context. The research can be classified as a longitudinal study of organisational change using a single case study. Although based in the interpretive tradition since it is concerned with actors' perceptions, interpretations and beliefs, it also draws on a Foucault-inspired critical framework of the kind developed in the work of Hoskin and Macve (e.g. 1986, 1988, 1994, 2000), and in the research into the financial sector undertaken by Morgan and Sturdy (2000). The particular model developed here is designed to enable the exploration of the effect of accounting practices on change from three perspectives - changing structures, changing discourses and the effect of both of these processes on power relations. It also draws on Fligstein's (1991) institutional framework to understand change in terms of the interplay across three relevant institutional contexts - the organisational field, the state, and the existing strategy and structure of the bank. The research draws on the literature and on primary data, including 41 in-depth, semi-structured interviews, and documentary and archive data. The main contributions of the research are related to the increase of visibility and perceived importance of accounting in the banking sector, and how accounting is significant beyond its technical roles. The study provides new insights into how management accounting practices, along with other organisational systems, play an important role in questioning, visualising, analysing, and measuring implemented strategies.

Bayesian nonparametric modelling has recently attracted a lot of attention, mainly due to the advancement of various simulation techniques, and especially Monte Carlo Markov Chain (MCMC) methods. In this thesis I propose some Bayesian nonparametric models for grouped data, which make use of dependent random probability measures. These probability measures are constructed by normalising infinitely divisible probability measures and exhibit nice theoretical properties. Implementation of these models is also easy, using mainly MCMC methods. An additional step in these algorithms is also proposed, in order to improve mixing. The proposed models are applied on both simulated and real-life data and the posterior inference for the parameters of interest are investigated, as well as the effect of the corresponding simulation algorithms. A new, n-dimensional distribution on the unit simplex, that contains many known distributions as special cases, is also proposed. The univariate version of this distribution is used as the underlying distribution for modelling binomial probabilities. Using simulated and real data, it is shown that this proposed model is particularly successful in modelling overdispersed count data.

What causes managers to manipulate their financial statements? How best can shareholders or prospective investors, auditors, financial analysts and regulators detect earnings manipulations? Addressing these questions is of critical importance to the efficient functioning of capital markets. For an investor it can result to improved returns, for an auditor it can mean avoiding costly litigation, for an analyst it can mean avoiding a damaged reputation, and for a regulator it can lead to enhanced investor protection and fewer investment disasters. The objective of this thesis is two-fold. The first objective is to investigate the frequency and the magnitude of earnings management. Second, is to provide an analysis of the characteristics of companies discovered to manipulate earnings and the determinants of these manipulations. Exploratory interviews with the Financial Reporting Review Panel suggest that earnings manipulation usually results from escalating earnings management that after a certain stage violates accounting principles. This is analysed in a review of a series of companies publicly criticised for applying aggressive accounting practises. It is suggested that these cases involve specific accounting standards that require increased judgement from management. In order to gain a broader view of the extent that companies manage earnings, this thesis examines the distribution of earnings among thresholds such as zero earnings and earnings decreases. This thesis documents evidence of unusually low frequencies of small decreases in earnings and small losses and unusually high frequencies of small increases in earnings and small positive earnings. Additional evidence suggests that three components of earnings, cash flow from operations, changes in working capital and discretionary accruals, are used to achieve increases in earnings. Finally, this thesis presents evidence of the characteristics of firms that manipulate earnings and proposes a model for detecting earnings manipulation. Companies found to manipulate earnings appear to have lower accrual quality, declining performance, weaker corporate governance structure, weaker balance sheet and increased leverage. The output of this investigation is a scaled logistic probability model for discriminating accounting manipulations, where higher values suggest a greater probability of manipulation.