This thesis focuses on the liquidity risk and its impact on bond prices of the international markets and comprises three self-contained research papers. In the first research paper, we examine the role of the liquidity in the pricing of sovereign U.S. dollar bonds in emerging markets. We extend Acharya and Pedersen’s (2005) liquidity-adjusted capital asset pricing model to the bond market and find that both liquidity level and multiple liquidity risks are priced factors for the expected excess return of U.S. dollar bonds issued by developing countries. The combined effects of liquidity risk and liquidity level can explain as much as 1% per annum extra yield spread for the countries that have higher liquidity betas. Countries, which have a high correlation with the global market or U.S. stock market, have higher required bond returns than low correlation countries. The liquidity factor helps explain the credit spread puzzle of high yields. Our empirical results also support a flight to liquidity across the studied countries and are robust after controlling for bond characteristics and the U.S. risk factors. The second research paper finds that both liquidity level and liquidity risk are important in explaining the cross-section of domestic government bond returns in 39 countries (both emerging and developed) around the world. After controlling for other market factors and bond characteristics, liquidity level and liquidity risk together can explain as much as 0.41% per annum of extra yield for the highest versus the lowest liquidity risk countries, which are China and Argentina respectively. There is also an evidence of liquidity spillovers from the U.S. equity market to domestic bond markets around the world. Employing a conditional model, which allows both time-series and crosssectional variations in liquidity betas, we find that the impact of liquidity risk is time varying across two different regimes: it increases in times of high uncertainty and is always larger in emerging than in developed countries. Nevertheless, the price of risk or premium required by investors for holding this time-varying risk is relatively modest. The third research paper examines whether liquidity spillovers between sovereign bonds are systematic or idiosyncratic in character. A theoretical model is developed, which demonstrates that idiosyncratic spillovers require returns to be correlated, whereas systematic spillovers require volatilities to be correlated. We apply the model to sovereign bonds in 35 emerging markets, aggregated for some analyses into Asian, European and Latin American regions. We find liquidity spillovers mainly from Latin America to the other regions and they are both systematic and idiosyncratic in character. Further cross-sectional analysis (by country) and time-series analysis (by region) show that systematic spillovers are more important than idiosyncratic spillovers. The conclusion is that most liquidity risk across emerging bond markets is systematic and therefore cannot easily be hedged away. This has important implications for portfolio selection by fund managers and for the regulation of systemic risk.

Under the pressure of the population explosion amconstitutional changes, social and economic conditions in Mauritius went through a process of rapid change after the Second World War. The introduction of universal suffrage unseated the white plantocracy and brought to power the representatives of the urban and rural working classes. This led to fundamen~ changes in the Government social and economic policy. In 1963, Government fixed the wages and conditions of employment of agricultural and non-agricultural workers in the sugar industry. The first chapter describes the structure of the industry and the organisation of cane production on sugar estates. We study the pattern of land owPership characterised by the high concentration of cane land on millers' estates. The distribution of land will influence the rate of production and the allocation of resources inside the industry and the demand for and supply of labour on estates. In the second chapter we study the Island's social system and its influence on Government labour policy. The forces which led to the Government intervention in the labour market originated in the social structure of the Mauritius plantation economy with its rigid divisions. This accounts for the underdevelopment of industrial relations which prompted direct Government intervention in labour matters. The third chapter concentrates on the impact of Government regulations on the level of wages in the economy. The first part focusses on the importance of the sugar industry as a wage leader. We then study the effect of Government policy on the structure of wages and finally its influence on the distribution of employment. The analysis of the macro-economic structure forms an essential part of the work. The fourth chapter comprises a detailed quantitative description of the structure of the Island economy, which provides a convenient framework for the study of the effects of wage increases on the Government finances and the Balance of Payments. The fifth chapter is divided into two parts. In the first part we analyse the labour conditions on millers' estates through an investigation of the conditions of demand for and supply of labour. The second part provides an estimate of the marginal productivity of field labour during the crop and intercrop by means of production functions fitted to 1965 and 1973 data, in order to assess the effect of Government labour policy on the productivity of labour on estates.

Chapter 1 introduces the thesis providing an overview of the common themes and methods underlying this research. Chapter 2 reports an experiment that examines the characteristics of effective leaders in a leader-follower voluntary contributions game. We focus on two factors: leaders’ cooperativeness and their beliefs about followers’cooperativeness. We find that groups perform best when led by cooperatively inclined leaders, partly because they are intrinsically motivated to contribute more than non-cooperative leaders, partly because they are more optimistic about followers’ cooperativeness. Chapter 3 reports an experiment comparing sequential and simultaneous contributions to a public good in a quasi-linear two-person setting. As predicted, we find that overall provision may be lower under sequential than simultaneous contributions. However, we also find that the distribution of contributions is more equitable than predicted when the first-mover is predicted to free-ride, but not when the second-mover is predicted to free-ride. These results can be explained by second-movers’ willingness to punish free-riders, and unwillingness to reward first-movers who contribute. Chapter 4 investigates the impact of social comparisons on reciprocal relationships. Using a three-person gift- exchange game we study how employees’ reciprocity towards an employer is affected by pay comparison information (information about what co-workers earn) and effort comparison information (information about how co-workers perform). We find that pay comparison information does not affect reciprocity, while effort comparison information can influence reciprocal relationships in important ways. Chapter 5 also examines the impact of pay comparisons on effort behaviour. We compare effort in a treatment where co-workers’ wages are secret with effort in two ‘public wages’ treatments differing in whether co-workers’ wages are chosen by an employer, or are fixed exogenously by the experimenter. We find that pay comparisons are detrimental for effort, particularly when coworkers’ wages are exogenous. Chapter 6 summarises the findings of this research and concludes.

In the second chapter, we consider a mechanism of unstable fluctuations of aggregate investments by means of a global game approach. For this purpose, we extended a static global game to a dynamic one and paid attention to the effect of past aggregate investments on current profitability. Once this effect of aggregate investments between periods is taken into account, we can show that firms’ equilibrium strategies of investments become highly volatile over time. Moreover, long persistence of high or low economic activity can be explained by this model as well. The third chapter examines the effect of firms’ funding liquidity on macroeconomic dynamics and the role of liquidity markets. Here, we regard liquidity as firms’ accumulated net worth and introduce heterogeneity between firms with regard to their productivities and accumulation of their net worth. From our analysis, we show that under existence of externality between probabilities of liquidity shocks 1) the economy without liquidity markets is highly volatile. 2) Liquidity markets insulate the economy from liquidity shocks. 3) During an unstable economic environment, the economic activity can sharply drop in the existence of liquidity markets. The fourth chapter aims at showing risk shifting behaviour of financial intermediaries in the context of an economic growth model to analyze financial crises. In the low capitalized economy in which a rate of return on safe assets is high and households’ assets are scarce, investing in corporate sectors is more profitable than that of risky assets because the option value from investing in risky assets is low. However, as the economy grows, the rate of return on safe assets is decreasing whereas individual assets are increasing. In this situation, the option values of risky assets are increasing, which gives banks incentive to invest in risky assets leading some of the banks to be insolvent.

This thesis examines the sources of business cycle fluctuations in a developing Sub-Saharan African economy. We develop an open economy dynamic stochastic general equilibrium model (DSGE), which is log-linearized, calibrated, and estimated with Bayesian techniques using South Africa macroeconomic data. The model incorporates various features such as external habit formation, internal investment adjustment cost, variable capacity utilization, domestically produced goods prices and wages stickiness, incomplete exchange rate pass-through, and financial accelerator. The DSGE model also integrates seven orthogonal structural shocks: a financial market shock that affects both the premium on the assets held by households and the foreign interest rate, a cost-push shock, a productivity shock in the domestically produced goods sector, an export demand shock, a terms of trade shock, a government spending shock, and a monetary policy shock. The introduction of those structural shocks allows for an empirical investigation of their effects and contributions to business cycle fluctuations in the South African economy. Simulating the DSGE model and decomposing the forecast error variances of the observable macroeconomic variables, it emerges that the main driving forces of the growth rates of real GDP, consumption, and investment, as well as the trade balance to GDP ratio, are the export demand shock, the government spending shock, the terms of trade shock, and the productivity shock. The productivity, the price mark-up, and the terms of trade shocks drive the aggregate inflation. The financial market shock predominantly impels the domestic interest rate, while the monetary policy shock largely causes the exchange rate fluctuations. Real, nominal, and financial frictions are necessary to capture the dynamic of the South Africa macroeconomic data and critical to explain their volatility and persistence.

This thesis which compromise of three essays focuses on the theme of valuation, value premium anomaly, financing behaviour and emerging markets. The first essay studies the value growth puzzle in the context of conflict of interest between taxable and institutional investors. We model this conflict in a rational expectations framework and demonstrate how the differences in firm's characteristics (in terms of value versus growth) and the risk profile of the investors can explain the shape of CAPM's frontier in the overall economy without involving the beta parameter. We also explicate that the changes in taxable and non-taxable investors profile in a dynamic environment rationalize the value growth premium as illustrated by Malkiel (2003). Finally, our approach shed light on the issues raised by Shiller (1979,1981) and LeRoy and Porter (1981) that stock [bond] prices are too volatile to be rationalized by the discounted value of their expected dividends [coupon payments]. The second essay studies value anomaly in the context of four major emerging economies (i.e. Brazil, Turkey, China and India denoted by the acronym BTIC) with vast economic potential and Malaysia, a small emerging economy with top heavy, closely held, state-owned institutional setting. We attribute the anomaly to the investment pattern of glamour firms. Our empirical analysis illustrates that these firms have a tendency to hoard cash, delaying the undertaking of their growth options, especially in poor economic environments. This mitigates their business risk, but lowers their market valuation, driving down their returns. Our hypothesis also reconciles the diverging views stemming from both the neoclassical and behavioural perspectives. This third essay examines the target capital structure of Malaysian firms and their adjustment process in the pre- and post- Asian financial crisis. We utilize an unbalanced panel data set comprising of 184 firms and employ the Generalized Method of Moments (GMM) to study the relationship between a firm's characteristics and its capital structure targeting behaviour in the context of political patronage. Our results support the amalgamation of the well-known Pecking Order and Static Trade-off theories. It also illustrates that the financial crisis had a significant impact on the financial policy of Malaysian firms.

This thesis presents an experimental investigation of free riding behaviour and, more particularly, individual responses to it using, as a workhorse, the so called public goods game. This game starkly isolates the conflict between private and collective interest, providing us with a simple measure of the extent of free riding behaviour. The unifying theme of the thesis is elicitation and analysis of different indicators for how subjects perceive free riding under a number of treatment manipulations. Chapter 2 explores how people judge the morality of free riding in a public goods game by eliciting people's moral evaluations in hypothetical scenarios. The scenarios differed with respect to the framing of the game, the order of moves, and the behaviour of the non-judged player. Our findings suggest that free riding is perceived as morally reprehensible, except when the free rider moves second after observing that the other player free rode as well. We also find that moral judgments depend on others' behaviour, on framing and on the order of moves. Chapter 3 analyses the effect of framing on social preferences, as measured by self- reported emotions and punishment. Our findings are that, for a given pattern of contributions, neither punishment nor emotion depends on our framing manipulation. Chapter 4 assesses the behavioural consequences of unfair punishment. In this experiment, we generate an unfair environment by assigning punishment to all group members, irrespective of their first stage behaviour, We find that, although unfair punishment causes a different time profile of contributions, contributions are, on average, little different from in the standard punishment game; and the assignment of punishment in the latter is unaffected by experience of an environment with unfair punishment. However, a history of unfair punishment causes different reactions to helping behaviour and punishment received, respectively.

This thesis consists of three essays on behaviour under risk. First, I investigate experimentally three related questions: (1) the effects of small-scale changes in wealth on risk attitudes; (2) whether potential changes in risk attitudes induced by such wealth increment are affected by (a) by the span of time this small-scale change in wealth has been anticipated for, and (b) the form taken by the wealth increment. There are three major results. One, whether risk attitudes are affected by a small-scale change in wealth depends on the form taken by the wealth increment. Two, that failure in replicating "house" money effect suggests that people may treat windfall money differently from earned money. Three, that the attitudes to risk are stable over the span of time we investigate. Second, I investigate how cognitive ability relates to consistency of behaviour under risk. Individual behaviour can be consistent in several forms. I find that individuals with higher cognitive ability display more consistent behaviour - in terms of choice and displayed type of risk preferences. Yet, in contrast to some recent studies, I find that individual measures of attitudes toward risk are not associated with cognitive ability. Third, I investigate the efficacy of a punishment mechanism in promoting cooperative behaviour in a public goods game when enforcement of punishment is uncertain. Numerous experimental studies have found that a sanctioning system can promote cooperative behaviour. But they rely on perfect enforcement of punishment. I find that a sanctioning system can no longer promote cooperative behaviour in a public goods game when punishment enforcement is a low-probability event.

The objective of this study is to examine the motives that drive the propensity of households to save and households' portfolio allocation decisions. This interest has been spurred by the issue of low personal saving rates that has been observed across the globe over the past two decades. In addition, the perplexities concerning portfolio allocation choices despite rapid innovations of financial products warrants the need for further investigation on household's asset allocation decisions. Motivated by the above phenomena, this study was conducted with three main objectives. First, the study sought to identify the factors that are instrumental to the formation of household's saving motives, by examining households' socio-demographic and behavioural factors that influence their motivations to save. Second, the study aimed to determine the factors that influence the household's propensity to save. Third, the study targeted to evaluate the factors that impact the choice of assets that households save in, by examining their preferences in regards to low-risk assets, risky assets, and life insurance. The 2004 U.S. Survey of Consumer Finances (SCF), which a government sponsored triennial cross-section survey on the financial situation of American families, was chosen as an empirical basis to address the three research objectives mentioned above. Various econometric tools were used to analyze the relationships under investigation. Results indicate that all categories of saving motives, namely the life-cycle, precautionary, bequest and profit motives are significant determinants of the propensity to save. This suggests that planned saving are relevant in the household's saving decisions. Nonetheless, results also show that unplanned saving, stemming from the household's capabilities and opportunities to save, is a stronger determinant of household saving. Saving motivations are also found to be related to portfolio allocation choice. In particular, life-cycle and profit motives significantly impinged on the decision to own risky assets, while life-cycle and bequest motives strongly influenced the probability of owning life insurance. Meanwhile, results indicate that age and income are salient factors influencing the household's formation of saving motives, their propensity to save, and portfolio allocation choices.

The ‘New Keynesian’ model assumes that prices and wages are in an extreme ‘sticky’pattern. In this model, the ssumption that a lagged indexation scheme increases the persistence of inflation is in widespread used; however, in reality, this ad hoc indexation setup is inconsistent with the real data. Moreover, there is extensive evidence on micro price data indicates that heterogeneity in price stickiness is a commonly found feature of price setting throughout the Euro area. Therefore, this thesis aims at incorporating this micro price evidence in an elaborated New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model by using a Generalised- Taylor-Economy (GTE) and Generalised-Calvo (GC) price settings. This thesis first presents the models, which are an extension of Smets-Wouters (SW) model (2003) which replaces Calvo with indexation price setting with heterogeneous price settings. In these new price settings, the micro evidence of heterogeneous price stickiness is directly emerged into macro DSGE models. The findings suggest that heterogeneous price stickiness can generate long-lived inflation and output persistence. Indirect inference is then used to evaluate the DSGE models of the French economy under different price settings. The results of the testing show that all models with differentprice settings are comprehensively rejected. The models are then estimated with Bayesian techniques as SW (2003) by using seven key macroeconomic observables. The results show that the GC model has the best performance. The rankings of the different price setting models are also proven to be robust to different priors and observables. Indirect inference evaluations are then conducted based on Bayesian estimated models, and all models are rejected. Indirect inference is then used as an estimation method. The testing results are improved on all models. The GC model is still considered to be the best performance model among all of the different price setting models.