In this thesis we examine the relationship between corporate bond spreads and economic activity in eight European countries using data on 500 corporate bonds between July 1994 and May 2011 for the United Kingdom and between October 2001 and May 2011 for Austria, Belgium, France, Germany, Italy, Netherlands and Spain. We construct a unique dataset of corporate bond spreads from bond-level data employing a similar methodology to Gilchrist and Zakrajsek (2012a) in the United States. Thus, we ensure that our credit spread measure is not distorted by illiquidity, embedded options, or mismatched maturities and coupon schedules between the two bond instruments being compared. We evaluate the importance of the country-level corporate bond spread index in .predicting the future growth in real activity at the individual country level for various measures of economic activity (such as industrial production, unemployment available at monthly frequency; and employment and real GOP available at quarterly frequency). We find that the credit spread index is a consistent predictor of real activity even when we include measures of monetary policy tightness (such as the term spread and the real interest rate), other leading indicator variables (economic sentiment and consumer confidence) and factors extracted from a large macro dataset. Our results are consistent at different forecasting horizons and are robust to different measures of the credit spread index. We then decompose the credit spread by purging it of expected default, tax and liquidity premia in an attempt to determine what component accounts for its information Content. We find that the excess bond premium, an indicator of financial market tightness, is the major driving source of the spread's predictive content. When)He compare the predictive ability of the credit spread and the excess bond premium across individual countries within the Euro area and Outside the Euro area, we find that mainly the core European countries have similar predictive ability, while the other countries in the Euro area and the UK are more heterogeneous.

This thesis studies the determinants of subjective well-being, with the main focus on the data relating to developing countries. Chapters 2, 3, and 4 use new South African integrated household data to study the determinants of perceived quality of life at the cross-section. The fifth chapter compares the cross-sectional and over time structures of subjective economic well-being for Indonesia, whilst the sixth chapter uses reported well-being data from the British household panel survey to test an 'old' economic hypothesis in a new way. Chapter 2 tests whether the determinants of subjective well-being are the same when comparing poor and rich nations. Using South Africa as a case study, we find from the full sample analysis that in most comparable cases, the coefficient signs of the usual socio-economic factors in the life satisfaction regression equations for South Africa in 1993 are typically similar to that which would have been expected from data in the more-developed countries. However, our subpopulation regressions reveal very distinct life satisfaction patterns by race and region prior to the end of apartheid in South Africa. Chapter 3 analyses the labour market phenomenon in South Africa. We test whether unemployment hurts less in terms of life satisfaction when there is more of it around. After controlling for the relevant socio-economic factors, we find the unemployed's well-being to be significantly and positively correlated with the levels of others' unemployment in the region. Using the South African data set of 1997, the fourth chapter explores the contemporaneous relationship between measures of criminal victimization and reported well-being. We find crime victims to report significantly lower well-being than the non-victims, ceteris paribus. Reported life satisfaction is lower for nonvictimized respondents currently living in higher crime areas. However, we find some evidence that criminal victimization hurts less in areas of higher crime rates. Chapter 5 examines the cross-sectional and longitudinal relationships between objective and subjective economic ladder for Indonesia. It finds that individuals' perceptions of economic rank in the economy are more dependent on his or her socio-economic characteristics (i.e. health, education, marital status), as well as attitudes towards future economic ladder, than the current spending behaviour would normally reveal. The correlation between objective and subjective economic ladder is also weakened considerably when an individual's inborn predispositions are controlled for in the regression. Chapter 6 tests whether one's partner's happiness increases one's own happiness in a marriage. After using "residual" self-rated health to provide an instrument for the partner's life satisfaction and allowing controls on individual fixed-effects, we find strong evidence of an interdependent relationship in the reported life satisfaction between married partners, which is not present for those whom are merely Cohabiting.

This thesis empirically investigates the United Kingdom (UK) insolvency code by focusing on the formal procedures available to distressed firms in the UK. The UK insolvency code is characterised as a creditor-oriented system that enforces a binding agreement between the company and the creditors with a view to maximising payouts to the creditors. However, the government has introduced two major legislative changes – the Insolvency Act 1986 and the Enterprise Act 2002 – to move the UK insolvency code away from its creditor-orientation and towards a system that will increase the chances of distressed, but viable, firms in the UK to reorganise. The introduction of the Insolvency Act 1986 paved the way for distressed companies in the UK to enter into a formal procedure (administration) specifically introduced as a means of encouraging a culture of reorganisation for distressed firms in the UK. This thesis investigates the functioning of the UK code, by focusing on the two main formal procedures available to distressed firms (administration and administrative receivership) after the introduction of the 1986 Act. The introduction of the Enterprise Act 2002 resulted to the abolition of the administrative receivership procedure while maintaining the administration procedure as the key formal rescue procedure in the UK insolvency code. Hence, conducting research in the UK formal insolvency procedure is important as it provides empirical evidence on the administration procedure, which is now the main rescue vehicle under the Enterprise Act 2002. The thesis focuses on the post-1986 regime in the UK. It consists of 8 chapters including 3 empirical chapters. Chapter 5 examines a large sample of UK firms that initiated administration or administrative receivership procedures between 1996 and 2001. The aim is to investigate the choice of the resolution form between administration and administrative receivership. The main research question is to investigate whether the newly introduced administration procedure catered for firms with a different set of financial and other characteristics to those that entered administrative receivership. The findings show that there are some distinguishing characteristics between firms entering administration and those entering administrative receivership, implying that administrative receivership was not necessarily the most appropriate insolvency procedure for all distressed firms. Chapter 6 examines a sample of UK firms that entered administration between 1996 and 2001. The aim of this chapter is to investigate the differences between firms that reorganised in administration versus those that liquidate. The key issue here is whether administration procedure can differentiate between firms potentially likely to survive and those likely to fail. The findings show that there are significant differences between firms that reorganise and those that fail in administration, suggesting that the administration procedure is able to discriminate between viable and non-viable firms. Chapter 7 examines the subsequent performance of UK firms that reorganised in administration between 1996 and 2001 relative to a matched sample firms from the same industry and of relatively the same size. The aim was to assess the subsequent performance of companies that reorganise in administration using several key ratios, covering the period from two years prior to failure until three years afterwards. The results show significant improvements in the financial performance of reorganised firms, relative to a matched sample firms, during the period after entering administration. In summary, these results show the importance of introducing the administration procedure in the Insolvency Act 1986. Prior to this date, there was the possibility that some of those firms that reorganised in administration post-1986 might have been liquidated as there was no formal procedure aiming to reorganise distressed firms at that time. The findings clearly show the potential of the administration procedure in attracting distressed firms capable of reorganising. That procedure has now become the foundation upon which the UK insolvency code is built as indicated by the Enterprise Act 2002. However, having said that, the 1986 system also opened the way for severely distressed companies that should have been liquidated speedily in administrative receivership to attempt reorganisation in administration, thus wasting those firms’ already severely depleted resources further. In my opinion, the Enterprise Act 2002 should safeguard against this by putting in place procedures to prevent economically distressed companies from attempting to reorganise in administration.

The main objective of this thesis is to provide effective means for the valuation of popular financial derivative contracts with path-dependence and/or early-exercisable provisions. Starting from the risk-neutral valuation formula, the approach we propose is to sequentially compute convolutions of the value function of the contract at a monitoring date with the transition density between two dates, to provide the value function at the previous monitoring date, until the present date. A rigorous computational algorithm for the convolutions is then developed based on transformations to the Fourier domain. In the first part of the thesis, we deal with arithmetic Asian options, which, due to the growing popularity they enjoy in the financial marketplace, have been researched signicantly over the last two decades. Although few remarkable approaches have been proposed so far, these are restricted to the market assumptions imposed by the standard Black-Scholes-Merton paradigm. Others, although in theory applicable to Lévy models, are shown to suffer a non-monotone convergence when implemented numerically. To solve the Asian option pricing problem, we initially propose a flexible framework for independently distributed log-returns on the underlying asset. This allows us to generalize firstly in calculating the price sensitivities. Secondly, we consider an extension to non-Lévy stochastic volatility models. We highlight the benefits of the new scheme and, where relevant, benchmark its performance against an analytical approximation, control variate Monte Carlo strategies and existing forward convolution algorithms for the recovery of the density of the underlying average price. In the second part of the thesis, we carry out an analysis on the rapidly growing market of convertible bonds (CBs). Despite the vast amount of research which has been undertaken yet. This is due to the need for proper modelling of the CBs composite payout structure and the multi factor modelling arising in the CB valuation. Given the dimensional capacity of the convolution algorithm, we are now able to introduce a new jump diffusion structural approach in the CB literature, towards more realistic modelling of the default risk, and further include correlated stochastic interest rates. This aims at fixing dimensionality and convergence limitations which previously have been restricting the range of applicability of popular grid- based, lattice and Monte Carlo methods. The convolution scheme further permits flexible handling of real-world CB specications; this allows us to properly model the call policy and investigate its impact on the computed CB prices. We illustrate the performance of the numerical scheme and highlight the effects originated by the inclusion of jumps.

A sizeable stream of theoretical and empirical research in corporate finance reveals that corporate investment and financing activities in capital markets occur in waves through time, which are accompanied with many abnormal phenomena surrounding and after the announcement of events. Motivated by existing studies in firm-level and aggregate-level liquidity, which suggest the influence of (aggregate) liquidity on the activity and quality of corporate events, the purpose of this thesis is to investigate and understand the role of aggregate liquidity in explaining existing phenomena associated with corporate investment and financing events including mergers and acquisitions (M&A), initial public offerings (IPOs), seasoned equity offerings (SEOs), and, finally, corporate asset sales. Liquidity is an important and special asset for firms operating in imperfect capital markets. At aggregate level, corporate holdings of liquidity and the market provision of liquidity play important roles in capital markets, which inevitably affect the decision making and performance of corporate events. In this research, I investigate whether corporate investment and financing events occurring during high aggregate liquidity markets are fundamentally different from those occurring during low aggregate liquidity markets. Empirical evidences in this research show that the activity and quality of major corporate investment and financing events are substantially influenced by aggregate liquidity. Moreover, many of the market anomalies concentrate in certain aggregate liquidity conditions. For M&A, I find that there are more acquisitions in highliquidity periods, and acquirers buying during high-liquidity markets have significantly higher pre-announcement returns, but lower post-merger abnormal returns. For IPOs and SEOs, results show that there are many more public equity offerings in high-liquidity periods than in low-liquidity periods. Offering firms selling securities during high-liquidity markets have significantly higher occurrences of underpricing (discounting) and suffer larger long-run underperformance. For asset sales, highliquidity divesting firms have better performance measured by firm characteristics and post-sale returns.

This thesis collects three different contributions to monetary macroeconomics, covering both theoretical and empirical aspects. First chapter builds on the DSGE models of New Keynesian tradition, and studies monetary policy around a non efficient steady state. Using a two-stage approach developed by Levine, McAdam, and Pearlman (2007), I show that in the presence of backward looking firms, the central planner improves social welfare when it allows for a steady state rate of inflation marginally above zero. In the second chapter, I estimate a simple two-country DSGE model to study the behaviour of the Eastern European central banks, obtaining some innovative important results. First, a simple monetary policy rule mimicking an optimal rule together with the assumption about the existence of non-zero steady state rate of inflation deliver a significantly better to the data. Furthermore, the empirical hypothesis that central banks systematically target CPI inflation rather than PPI inflation is rejected for all the investigated Eastern European countries (EEC). In the third chapter, I use a Bayesian VAR with economically interpretable structural restrictions and zero restrictions on lags, to analyse the transmission channels of external shocks to an extended set of EEC. I study to what extent monetary policy shocks originating from the US and from Germany can explain fluctuations on Eastern European markets. To carry out the Bayesian inference, I use a Gibbs sampling approach. I find that the US monetary policy influences the EEC macroeconomic variables at least as much as its German counterpart.

The thesis consists on three chapters aiming to contribute to a growing literature on adaptive learning, a form of bounded rationality that has been attracting increasing interest both in the theoretical and practical fields, as an alternative to the commonly used rational expectations hypothesis on how expectations are formed among economic agents. The first chapter investigates whether it is possible to improve the ability of the standard real business cycle model to match the main stylised facts of emerging economies, taking the case of Mexico as an illustration, by assuming that agents are not fully rational and instead form expectations according to an adaptive learning rule. Two well-known rules - recursive least squares and its constant gain variant - are considered for this purpose. The degree of difficulty of the learning process is characterised by different starting values of the algorithms as well as different constant gains. The simulations show that the model under learning generally outperforms its rational expectations counterpart. Therefore, policymakers should take into account the fact that the expected welfare gains/losses of a particular policy reform, conceived assuming a fully-rational environment, might be significantly different if, in practice, agents behave as learners. Using a heterogeneous-agent model with three types of agents, namely capitalists, skilled workers and unskilled workers - assuming constant population shares suggesting low social mobility -, and allowing for different degrees of complementarity among these within the productive structure, the second chapter welfare-evaluates tax reforms consistent with a lower long run debt-to-output ratio for the United Kingdom, both under rational expectations and heterogenous learning. This chapter shows that, relative to the other tax reforms, capital tax cuts lead to the highest aggregate welfare but are skill-biased and can thus increase inequality in the long run. That is, depending on the elasticity of substitution between capital and unskilled labour, falls in the capital tax can result in higher levels of welfare inequality, even in the absence of other frictions and increases in other forms of taxation. On the other hand, reductions in labour taxes can hurt the capitalists. This chapter shows too that including the transition period in the welfare evaluation lowers the inequality effects of capital tax reductions since the complementarity between capital and all labour inputs is higher in the short- than in the long-run. Finally, while heterogeneous learning in the shape of differing initial beliefs after the reform can lead to a form of "irrational exuberance" after a tax cut, it can also exacerbate welfare inequality. Finally, the third chapter presents an heterogeneous-agent model with two types of agents, capitalists and workers - with constant population shares given the strong evidence on low social mobility -, calibrated to Bolivia´s data in order to examine the short and long-run effectiveness and distributional effects of various fiscal rules designed to impose restrictions on the evolution of public debt as a share of output, in response to two different sources of exogenous volatility (i.e. productivity and commodity shocks) and under different ways of forming expectations, namely rational expectations and heterogenous learning. The results show that under full rationality the fiscal rules generate a trade-off between debt-stabilisation and higher income inequality while, under some conditions, heterogenous learning can help to break such trade-off so that some of the rules can perform well in both fields. However, given the significantly high levels of income inequality and dependence on commodity revenues experienced by Bolivia, finding the best performing rule in response to all the relevant exogenous shocks this economy might face, appears to be a challenging task.

The first paper is “Handicapping Politicians: the optimal majority rule in incumbency elections.” The paper examines the incentives of politicians whose position of incumbency allows them to signal their quality through costly effort. Because an election has such a discrete outcome (to win or to lose), politicians will exert the most effort when they expect the election to be close, giving rise to a cluster of signals just above the threshold required to win. Two propositions follow: first, this clustering causes a skew distribution of signals, such that the median expected quality will be above the mean, so more candidates will be re-elected than would be re-elected under full information, i.e. an incumbency advantage. Second, because information is lost when politicians cluster, voters would prefer to handicap the incumbents to make their signals more revealing. In practice this can take the form of a supermajority rule for re-election. The second paper, “Comparisons and Choice”, shows that many apparently unrelated anomolies of choice can be explained as due to relative thinking. I conjecture that observing larger magnitudes of some goods tends to lower sensitivity to that good. This predicts contrast effects, anchoring effects, scope neglect, and common difference effects. We also introduce a technical novelty, evidence from joint choice, allowing us to map out a utility function. The third paper, “Relative Thinking and Markups,” applies the model of relative thinking to choice among retailers, when purchasing a single good. We show that demand curves will tend to be less sensitive for higher price goods, so that in the case of unit demand (where markups, price dispersion, and entry are normally independent of cost) markups will be increasing in cost, price dispersion will be increasing in cost, and entry will be increasing in cost. We show that evidence from the IO literature, especially evidence on price dispersion, is consistent with these predictions. We also introduce a novel dataset of costs and prices from a drugstore in which there is a very tight positive relationship between cost and markup.

This thesis contributes to the literature that analyses the term structure of interest rates from a macroeconomic perspective. Chapter 1 studies the transmission of monetary policy shocks to the US macroeconomy and term structure. Based on estimates of a Macro-Affine model, it shows that monetary policy shocks trigger relevant movements in bond premia, which in turn feed back into the macroeconomy. This channel of monetary transmission shows up importantly in the pre-Volcker period, but becomes irrelevant later. This chapter concludes with an analysis of the macroeconomic implications of shocks to expectations about future monetary policy actions. Chapter 2 proposes a regime-switching approach to explain why the U.S. nominal yield curve on average has been steeper since the mid-1980s than during the Great Inflation of the 1970s. It shows that, once the possibility of regime switches in the short-rate process is incorporated into investors' beliefs, the average slope of the yield curve generally will contain a new component called 'level risk'. Level risk estimates were found to be large and negative during the Great Inflation, but became moderate and positive afterwards. These findings are replicated in a Markov-Switching DSGE model, where the monetary policy rule shifts between an active and a passive regime with respect to inflation fluctuations. Chapter 3 develops a DSGE model in which banks use short-term deposits to provide firms with long-term credit. The demand for long-term credit arises because firms borrow in order to finance their capital stock which they only adjust at infrequent intervals. The model shows that maturity transformation in the banking sector in general attenuates the output response to a technological shock. Implications of long-term nominal contracts are also examined in a New Keynesian version of the model. In this case, maturity transformation reduces the real effects of a monetary policy shock.

This thesis investigates distortions in credit and equity markets. It provides insight into sources of volatility in these markets and their implications for monetary policy. Chapter 2 analyses optimal monetary policy in an economy with a credit friction and capital. A central bank implementing policy optimally will face a trade-off in stabilising inflation, the composition of output, and the net worth of borrowers. The importance of net worth is a new finding in the literature, and reflects the central bank's concern that distortions in credit markets can reduce welfare if ignored. In addition, it is shown that some tolerance of inflation can be optimal in response to shocks that reduce borrowers' net worth. Chapter 3 considers distortions in equity markets and their implications for economic decision-making. It analyses whether changes in the distribution of technology, coupled with optimal expectations on the part of investment-firm managers, can induce endogenous optimism or pessimism. And whether this optimism or pessimism can in turn lead to equity mispricing, and distorted economic decisions. Using a simple general equilibrium model, it is shown that a favourable change in the distribution of technology can induce endogenous optimism leading to over-valued equity prices and over-investment, when compared with an economy in which rational expectations are used. Chapter 4 focuses on identifying the effects of mispriced equity. I find that equity mispricing has statistically significant effects on household consumption and portfolio allocation decisions. These effects are estimated to be non-trivial when allowing for episodes of significant mispricing such as an equity price bubble. Taken together, these chapters suggest that distortions in credit and equity markets can be important, and should be taken into consideration by policymakers to the extent that they affect real economic decisions.