This thesis studies the role of global risk within the context of international finance. In total, the thesis is composed of three essays. In Chapter 2, I investigate the impact of global risk on the cross-border flows of funding between banks. Specifically, I decompose gross cross-border bank-to-bank funding between arms-length (interbank) and related (intragroup) funding, and show that while interbank funding is withdrawn when global risk is high, intragroup funding remains stable during these periods, despite being more volatile on average. The results are in contradiction with theoretical predictions for the behavior of cross-border banking fl ows, and help explain why certain banking systems lost more cross-border bank-to-bank funding than others during the global financial crisis of 2008. In Chapter 3, I turn my attention to the currency market and show that global imbalances are a fundamental economic determinant of currency risk premia. I propose a factor that captures exposure to countries' external imbalances - termed the global imbalance risk factor - and show that it explains most of the cross-sectional variation in currency excess returns. The economic intuition of this factor is simple: net foreign debtor countries offer a currency risk premium to compensate carry trade investors willing to finance negative external imbalances. Finally, in Chapter 4, I focus again on the currency market by investigating the fundamental source of variation in currency betas. Theoretical models of currency premia offer precise explanations for why currencies exhibit heterogeneous exposure (betas) to risk. Characteristic factors, constructed to reflect these 'beta predictions' of leading models of currency premia would, therefore, also be expected to explain the cross-section of currency portfolio returns. I find, however, that none of the factors can explain any of the cross-sectional spread in returns. Yet alternative non-theoretical characteristic factors, based on macroeconomic, financial and political risk, perform almost universally well in cross-sectional tests. But these factors can also be dismissed as explanations for heterogeneous currency betas, with a simple secondary test. The findings imply a need for a stricter empirical benchmark for assessing all theoretical models of currency premia. Moreover, by investigating currency betas, I show that standard empirical asset pricing techniques can filter out around 99% of spurious currency risk factors.

The first essay (Chapter 2) highlights the positive effect of banks on direct financing in a setting where each agent believes that she can evaluate information better than any other agent. Banks emerge endogenously and they encourage direct financing through the use of underwriting and liquidity (reserve) requirements. Banks sell underwriting contracts to investors who wish to invest directly. Bank reserves reassures direct investors that the underwriting contract will be fulfilled. This results in the financing of positive NPV projects that were previously denied credit. In the second essay (Chapter 3) an entrepreneur has the choice to access either monitored bank financing or un-monitored bond financing. Project type is private information of the entrepreneur and as a consequence, in the unregulated equilibrium, there is some inefficient over-monitoring by banks when the banking sector is competitive. Bank lending becomes more efficient and the net interest margin falls as bond financing becomes cheaper and the bond market expands. In contrast, if the banking sector is monopolistic, the equilibrium is either efficient or there is inefficient under-monitoring by banks. The final essay (Chapter 4) proposes a model of optimal bank capital structure. There are two types of potential investors with different monitoring skills. The skilled can monitor a project and increase its productivity, whereas the unskilled cannot. Also, the skilled can divert a part of the project’s return without being detected by the unskilled. Banks emerge endogenously and bank capital structure is relevant. The skilled become the bank’s equity-holders whereas the unskilled become depositors. Our model explains why bank equity is more expensive than deposits.

This thesis consists of two chapters and aims to investigate the presence Islamic banks in Indonesia in the context of stability and monetary policy transmission mechanism. The first chapter compares bank stability, in particular profit stability, in Islamic versus conventional banks amid business cycle fluctuations. The unique characteristics of Islamic finance principles hypothetically involve different financial structures and provide stability for banks that comply with them. Using monthly bank-level data with comparable banks across the two types, I investigate the dynamic responses of individual banks to business cycle fluctuations. The dynamic estimation results show that the profits of Islamic banks’ are more stable than those of conventional banks in the short run, yet generally indicate no significant difference in the long run. However, the inclusion of the loan-to-asset ratio removes the remaining short-run differences. I check for robustness by estimating the static relationship between individual bank’s profits and the average profitability of the total banking industry, and the outcomes support the no-difference results. The second chapter compares the monetary transmission through Islamic and conventional banks by investigating how a particular bank asset portfolio, which corresponds to their type from being conventional or Islamic, determines the equilibrium rate of return on loans and on deposits which in turn affects their loans and net-borrowing from the central bank. Certain application of Islamic finance principles leads to a marked difference in Islamic banks’ assets portfolio which corresponds to a consistently higher loan-to-asset ratio in comparison to conventional banks. I test a set of predictions conveyed by the theoretical model using a panel of individual bank data. The results turn to be highly dependent on how well the two types of banks are segregated from each other, in which slack segregation may dissipate the potential differences. In particular while initially the results show no significant difference in responses of the two types of banks to the central bank policy rate, excluding Islamic windows from the sample allow the potentially difference to be more apparent and significant. Overall, the possibility that both types of banks may after the same pool of consumers exposes them to compete with banks from the other type, generating arbitrage opportunities that drive prices toward equality across types and impede the potential difference across banks.

The aim of this thesis is to investigate the determinants of the behavioural intention of Internet banking adoption among individual members of a corporate customer’s buying centre, and to compare the difference between adopters (corporate customers) and non-adopters (companies that do not currently use Internet banking) with an emphasis on the factors that influence the adoption of Internet banking (IB). Five theoretical models were applied: theory of reasoned action (TRA), theory of planned behaviour (TPB), technology acceptance model (TAM), decomposed theory of planned behaviour (DTPB), and technology readiness (TR). Responses were explored in terms of the intention, attitude, subjective norm, perceived behavioural control, usability and relevance, innovativeness, operational concerns, normative influence, self-efficacy, and facilitating condition, in relation to the intent to adopt IB. The main purpose of the first qualitative study, which consisted of interviews with eight adopters, eleven non-adopters and three IB managers, was to understand the factors that influence corporate customers to adopt IB, and also to help formulate the design of the questionnaire. The main study involved the development and testing of a questionnaire with 431 respondents (257 adopters and 174 non-adopters). Factor analyses and multiple regressions were employed in the evaluation of the questionnaire. It was found that (1) attitude, subjective norm, and perceived behavioural control are the major factors in the corporate customer’s intentions toward IB adoption; (2) usability and relevance, innovativeness, and operational concerns are the key constructs that have influence over the corporate attitude towards the adoption of IB; (3) normative influence is found to be the construct that most heavily influences the subjective norm towards corporate adoption of IB; (4) self-efficacy and facilitating condition are the constructs that influence perceived behavioural control towards corporate adoption of IB; and (5) other than innovativeness, there was no significant difference between adopters’ behavioural intention and non-adopters’ behavioural intention. The research contributes to the development of a theoretical framework that identifies and tests the antecedents of attitude, subjective norm, and perceived behavioural control of buying centre participants’ intentions toward IB adoption. This study confirms that TR can be employed to explain the phenomena of the corporate customer’s behavioural intentions toward IB. In addition, this study contributes to the literature through its comparison of the behavioural intentions toward IB adoption between adopters and non-adopters.

This thesis studies the use of Lévy processes for option pricing and portfolio allocation problem. First, a new Geometric Lévy model is proposed to capture the volatility smirk exhibited by index options. To solve the new model, an efficient numerical algorithm is adopted, which can be applied to any time-changed Lévy model. It is the first attempt to model multi-scale volatility along with the leverage effect, based on pure jump processes. Calibration results show that the proposed model exhibits excellent performance. Second, the dynamic portfolio choice problem in a jump-diffusion model is considered, where an investor may face constraints on her portfolio weights. With several examples, the impact of no-short-selling and/or no-borrowing constraints on the performance of optimal portfolio strategies is examined. Last, the portfolio allocation problem is reconsidered with a new multi-variate jump-diffusion model, while the effect of asymmetric correlation is taken into account Empirical results show that the new model fits asymmetric correlations well. By allowing investment constraints, the economic loss of ignoring asymmetric dependence is evaluated. An explanation for the under-diversification problem is provided, concerning the risk caused by asymmetric correlations.

This thesis examines the Leverage Effect in stocks, stock indices and stock options. The Leverage Effect refers to the observed negative correlation between an asset’s return and its volatility. Part I presents an examination of the Leverage Effect at the stock level. The research provides the first investigation of stock returns, volatility and trading volumes from an information theoretic perspective. It finds support for trading volumes as an explanation for the stock level Leverage Effect and shows that index returns are also an important factor. It also analyses how trading behaviour is influenced by an investor’s risk preference and how this relates to return-volume correlation. Predictions of an analytical model of trading behaviour are verified empirically using a range of stocks and institutional trades in S&P500 stocks. Part II examines the Leverage Effect at the index level. The research supports previous findings that the Leverage Effect is far larger at the index level and decays more quickly. Again using an information theoretic analysis, it shows that it is driven by a combination of trading volumes and an asymmetric relationship between index returns and stock return correlations. Part III examines the time variation of the Leverage Effect at the stock and index levels. It shows that they are both time dependent and discusses the relationship between the stock and index levels. It also documents changes in market behaviour since the 2008 financial crisis. Part IV examines the Leverage Effect in stock options by developing a descriptive statistical model of implied volatility using multivariate q-Gaussian distributions. This is the first research to show that implied volatility can be modelled using q-Gaussian distributions and provides a tool for trading and risk management. It also shows how the multivariate q-Gaussian distribution could be used to generate virtual data for scenario testing and option pricing using a simple Markov Chain or Auto-regressive process. Finally PartV presents the conclusions of the thesis and avenues for future research.

It is now routine to consider the full probability distribution of downturns in many sectors. In the financial services sector regulators (both internal and external) require corporations not only to measure their risk, but also to hold a sufficient amount of capital to cover potential losses given that risk. Another example is in emergency service vehicle routing, where one needs to be able to reliably get to a destination within a fixed limit of time, rather than taking a route which may have a shorter expected travel time but could, under certain travel conditions, take significantly longer [Samaranayake et al., 2012]. Further examples can be found in food hygiene [Pouillot et al., 2007] and technology infrastructure [Buyya et al., 2009]. In the first part of the thesis we consider the implications of risk in portfolio optimisation. We construct an algorithm which allows for the efficient optimisation of a portfolio at various risk points. During this work we assume that the value at risk can only be estimated via sampling; this is because it would be near impossible to analytically capture the probability distribution of a large portfolio. We focus initially on optimising a single risk point but later expand the work to the optimisation of multiple risk points. We study the ensemble defined by the algorithm, and also various approximations of it are then used to both improve the algorithm but also to question exactly what we should be optimising when we wish to minimise risk. The key challenge in constructing such an algorithm is to consider how much the optimisation method biases the samples used to estimate the value at risk. We wish to select genuinely better solutions; not just solutions which were somehow lucky, and hence treated more favourably, during the optimisation process. In the second part of the thesis we switch our focus to considering how we can understand when large losses will occur. In the financial services sector this translates to asking the question: under what market conditions will I make a (very) significant loss, or even go bankrupt? We consider various methods of answering this question. The initial algorithm relies heavily on an understanding of how our portfolio is modelled but we work to extend this algorithm so that no prior knowledge of the system is required. In the final chapter we discuss some further implications and possible future directions of this work.

This thesis comprises of five chapters. The first chapter gives a brief introduction on the existing literature about the optimal trading order execution problem, the concept of limit order book, market impact models and their underlying market microstructure. We will also provide some brief review on the regularity problem of market impact model and the resilience effect of the LOB market. Some notions about the limit order book trading will also be introduced in this chapter. The second chapter, a game theoretical model given by Rosu [74] is introduced and the same side and opposite side resilience are reinterpreted for this model. The solution structure of a Markov equilibrium of this model is obtained for the same side resilience by providing a rigourous mathematical analysis. We also provide a sufficient condition for the existence of real-valued solutions under this situation. We also reproduce the results in Rosu [74] about the opposite side resilience in this LOB model. In the third chapter, we extend the LOB market impact model in Obizhaeva and Wang [65] by introducing two sides resilience and a general LOB shape function. Two existing LOB market impact models are then replicated by our extended model, allowing the cross-impact resilience rate going to zero and infinity respectively. In the last two chapters, we conduct two applications of our extended market impact model. These two applications are able to help us study the optimal execution problem and the market regularity issues. We find out that the minimum cost of the zero-spread LOB model is a lower bound of the minimum cost of our extended market impact LOB model and those models with zero bid-ask spread have weaker regularity conditions than those with a non-zero bid-ask spread.

The first part of this thesis presents a decomposition of household savings. One of the explanations for the wealth gap is that households with the same income level and demographic characteristics present differences in saving rates. This issue has been studied for African American versus Whites, but has not been directly addressed for Hispanics. Using pre-retirement data from the Health and Retirement Study, I compute saving rates as the ratio of wealth change to income over the years 1992-1998 and 1998-2004. In a regression framework I find that Mexican Americans, but not other Hispanics, have lower saving rates than Whites, even after controlling for income and socio-demographic factors. The inclusion of Social Security (S.S.) and pension wealth widens the gap further, which reflects the lack of pensions’ coverage among Mexican Americans. In contrast, the difference between African Americans and Whites is only significant when retirement assets are not added to total wealth, consistent with the equalizing effect of S.S. Then I conduct a regression decomposition for the mean gap in saving rates and find that: i) the component of the Mexican American-White differential not explained by observable characteristics becomes significant when S.S. and pensions are included; ii) with or without retirement assets the unexplained racial gap disappears; and iii) income and education are the main predictors of the savings gaps. The second and third parts investigate the effect of bankruptcy protection on households’ portfolio choice. The debtor protection provided by the U.S. personal bankruptcy law reduces exposure to uninsurable risks: it allows defaulters to discharge unsecured debt and to protect a certain amount of home equity. A reduction in background risk - for example, resulting from labor or entrepreneurial income - can affect the demand for risky financial assets. Thus, the bankruptcy protection can affect ex ante households’ willingness to tilt the financial portfolio towards those assets. On the one hand the implicit consumption insurance may lead to higher risk-taking by increasing the consumption floor if there is a negative wealth shock ("risk-taking channel"). On the other hand, more generous bankruptcy provisions will lead to a reduction in the demand for stock via: i) a higher probability of bankruptcy, since stocks are lost in bankruptcy because they are not protected ("protection channel"); or ii) worse credit market conditions -less access to credit at a higher price-, since higher bankruptcy protection implies a reduction of the collateral ("credit market channel"). In the context of a portfolio choice model, in the second chapter I illustrate how the bankruptcy protection can affect risk-taking through the "risk-taking channel" and the "protection channel". In the third part, I examine empirically the relationship between bankruptcy protection and stock market participation by exploiting the variation in that protection across states and over time. I find that doubling the amount of home equity that can be protected reduces stock ownership by 2 p.p. at intermediate protection levels ($22,000 to $90,000). This decline is restricted to high-asset and high-income households, which are more likely to participate in the stock market. Since poor rather than rich households are affected by worse credit market conditions when bankruptcy becomes more generous, the "credit market channel" is not a plausible mechanism. I do not find any effect of higher protection on the share of stocks in liquid assets, which suggests that the bankruptcy protection does not affect households’ risk appetite. My findings are consistent with unprotected rather than risky assets becoming less attractive as the level of protection increases, as predicted by the "protection channel".

It is becoming increasing clear that; in banks; the sharing of knowledge amongst the senior executives has not been as effective as it should have been. The lack of knowledge amongst senior executives about the level of risks taken in sub-prime lending, the resulting "toxic assets‟ and the global nature of the instruments used to spread risks is said to be the main contributing reason for the current worldwide crisis in banks. Banks in Jordan, the focus of this study, are not immune from the exposure to the risks. The banking sector in Jordan is the most important in the Jordanian national economy and has effectively contributed to improving economic development through its important role in mobilising savings and channelling them into different fields of investment. Therefore, the overall aim of this research is to propose that developing a knowledge management (KM) approach to support managing credit risk will help banks in general, and Jordanian banks in particular, in improving the process of managing credit risk. To reach the aim, several objectives have been constructed: 1. Reviewing current status of KM and its relationship with CRM 2. Developing a scale to measure KM behaviour and practices 3. Determining current KM status in Jordanian banks 4. Building a CR decision support system using internal implicit knowledge to reduce the rate of defaults. As a result of this research, a KM approach has been developed to support managing credit risk. The approach contains the following steps: identify, measure, analyse, improve, and evaluate. Using the new KM approach, the main conclusion of this research suggest that considering credit risk management and KM together gives a much stronger basis for banks to manage credit risk.