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.

An enduring problem facing microfinance institutions is how to attain financial sustainability. Several studies have been conducted to determine the factors affecting financial sustainability of microfinance institutions using large and well developed MFIs in various countries. However, no such study has been conducted in rural Tanzania where majority of MFIs are small, most of which are member-based (cooperatives). Consequently, the factors affecting their financial sustainability are not known. This study, therefore, was set to bridge this knowledge gap. This study followed a quantitative research approach using panel data regression as the main data analysis technique. The study was based on four years primary and secondary data obtained from 98 sampled rural MFIs in Tanzania. We found that microfinance capital structure, interest rates charged, differences in lending type, cost per borrower, product type, MFI size, number of borrowers, yield on gross loan portfolio, level of portfolio at risk, liquidity level, staff productivity, and the operating efficiency affect the financial sustainability of rural microfinance institutions in Tanzania. The study makes the following key contributions to knowledge in addition to determining factors affecting financial sustainability of rural microfinance institutions in Tanzania: First, the study reveals that there exists simultaneous causality relationship between financial sustainability and breadth of outreach. When this relationship is not considered in determining factors affecting financial sustainability there may be inconsistent evidence on the existence of mission drift. Second, it unveils the trade-off between financial sustainability and breadth of outreach with regards to the minimum loan size when group lending is used. That is, larger loan size, while improves profitability, reduces the breadth of outreach. Third, the study provides empirical evidence that the impact of a particular lending type on microfinance institution‟s profitability will depend on the term to maturity and number of instalments reflected in its lending terms. Fourth, consistent with the institutionists‟ view, the study provides empirical evidence that financial sustainability of microfinance institutions improves their breadth of outreach. Lastly, the study documents the applicability and limitations of previous studies to rural microfinance institutions in Tanzania.

I study how asymmetric information affects the financial market in three papers. In the first paper, I study the joint determination of optimal contracts and equilibrium asset prices in an economy with multiple principal-agent pairs. Principals design optimal contracts that provide incentives for agents to acquire costly information. With agency problems, the agents’ compensation depends on the accuracy of their forecasts for asset prices and payoffs. Complementarities in information acquisition delegation arise as follows. As more principals hire agents to acquire information, asset prices become less noisy. Consequently, agents are more willing to acquire information because they can forecast asset prices more accurately, thus mitigating agency problems and encouraging other principals to hire agents. This mechanism can explain many interesting phenomena in markets, including multiple equilibria, herding, home bias and idiosyncratic volatility comovement. In the second paper (co-authored with Yao Zeng from Harvard University), we investigate how firms’ cross learning amplifies industry-wide investment waves. Firms’ investment opportunities have idiosyncratic shocks as well as a common shock, and firms’ asset prices aggregate speculators’ private information about these two shocks. In investing, each firm learns from other firms’ prices to make better inference about the common shock. Thus, a spiral between firms’ higher investment sensitivity to the common shock and speculators’ higher weighting on the common shock emerges. This leads to systematic risks in investment waves: higher investment and price comovements as well as their higher comovements with the common shock. Moreover, each firm’s cross learning creates a new pecuniary externalities on other firms, because it makes other firms’ prices less informative on their idiosyncratic shocks through speculators’ endogenous over-weighting on the common shock. In the third model, we study the effect of introducing an options market on investors’ incentive to collect private information in a rational expectation equilibrium model. We show that an options market has two effects on information acquisition: a negative effect, as options act as substitutes for information, and a positive effect, as informed investors have less need for options and can earn profits from selling them. When the population of informed investors is high because of the low information acquisition cost, the supply for options is larger than the demand, leading to low option prices. Low option prices in turn induce investors to use options instead of information to reduce risk, while informed investors have little opportunity to earn profits from selling options to cover their information acquisition cost. Introducing an options market thus decreases investors’ incentive to acquire information, and the prices of the underlying assets become less informative, leading to lower prices and higher volatilities. A dynamic extension of this analysis shows that introducing an options market increases the price reactions to earnings announcements. However, when the information acquisition cost is high, the opposite effects arise. Further analysis shows that our results are robust for more general derivatives. These results provide a potentially unified theory to reconcile the conflicting empirical findings on the options listing of individual stocks in both the U.S. market and international markets.

Using a very comprehensive Chinese firm-level data covering the period of 2000 to 2005, this thesis empirically assesses the determinants and consequences of Foreign Direct Investment (FDI) in China. In particular, the novelty of this research lies in our firm-level analysis which is based on a large sample of firms in 31 host provinces, allowing us to explore the question by distinguishing different modes of FDI inflows. We employ binary-choice models to estimate how institutional quality and pre-acquisition firm heterogeneity affect the probabilities of domestic firms being acquired by foreign investors. We find better institution quality encourages FDI and this effect is stronger in capital-intensive and R&D intensive industries. Moreover, in capital-intensive industries, better institutions reduce the probability of domestic firms being wholly acquired. We also find evidence of 'cherry-picking' which is stronger in capital- and R&D- intensive industries. We then apply a combination of propensity-score matching and difference-in-difference estimation to assess the effect of foreign acquisition on acquired firms with a focus on export performance, productivity and financial indicators. We find significant FDI-induced export lift and finance improvement. However, FDI-induced productivity change is not significant. Finally, we investigate whether location determinants have different effects on attracting greenfield FDI as compared to acquisition FDI. We find the industry cluster pushes greenfield FDI away due to competition effect while attracting acquisition FDI, indicating that procurement opportunities have a strong impact on acquisition FDI.

This thesis is concerned with an examination of the available domestic retention capacity and the demand for international reinsurance in the Arab World. The study has been broken down into the following basic components: 1. The development of the insurance markets of the Arab countries is traced against the background of the economic, political, demographic and other changes, including the growth of demand for insurance, that have occurred in the region over the last few decades. 2. Insurance legislation and supervision, which varies greatly throughout the Arab region, is examined in order to identify the effect it may have on the development of national markets. 3. The market capacity required for the insurance of large risks and natural hazards is analysed, revealing that normal reinsurance arrangements and local retention capacity can absorb only a very small proportion of those risks; and that Arab insurers have a growing need for catastrophe excess of loss reinsurances. 4. The performance of Arab reinsurance companies and pools as a means of improving retention capacity is examined based on data collected from two reinsurance companies and five pools, to demonstrate how retention capacity can be improved. 5. Finally, a theoretical and empirical investigation is conducted into the determination of retention limits. Factors relevant to decisions on fixing retention limits are examined, and the relationship of company objectives to retention limits and the effect of different forms of reinsurance on the size of retained premium income are discussed. The study ends with an analysis of the fire, marine cargo and motor reinsurance programmes of two Arab insurance companies to see whether their retention policies are in line with accepted reinsurance practice or whether they could retain more of their business for their own account. The Arab insurance industry is still in its infancy, with all the attendant inadequacies such a state implies which brings with it two major problems - the inability of retention capacity of local insurers to respond sufficiently rapidly to changes in the economies of Arab countries and the heavy reliance on foreign reinsurance, which in turn leads to low retained premium income. It is hoped that this thesis will have provided an insight into ways in which Arab insurers and reinsurers could themselves meet more of their countries' insurance needs.

This thesis examines cross-market correlations between means and variances in sovereign credit markets and captures the presence of any contagion effect by focusing on parallel movements between markets in the wake of the recent crisis. Furthermore, it focuses on the effect of policy interventions on the dynamics of these correlations. First, to look at the correlation between markets, we investigate the interaction between sovereign spreads and creditworthiness. Our results suggest that there are stable long-term cointegration relationships and significant short-term reactions between government CDS spreads to rating and outlook changes, with rating and outlook leading CDS spreads. After confirming the leading role of credit ratings, we further investigate the spillover effect from ratings to CDS spreads across markets and countries. We are concerned with the spillover effect of a change in the sovereign credit rating and outlook of one country on the sovereign CDS spreads of other countries. We find that rating and outlook announcements originating from different countries have a strong spillover effect across countries but not across regions, while countries’ initial credit status has limited effect on such spillover. Moreover, the US market is a strong source of global spillover to all the countries. After controlling for US factors, the international spillover effects are found to be stronger during crisis periods than in tranquil periods. In addition, credit outlook changes have a greater impact on sovereign CDS spread responses than rating change announcements, suggesting that outlook changes carry more new information. Furthermore, we are also concerned with the influences of rescue plans by the European Union (EU) and the International Monetary Fund (IMF) on the interdependence of sovereign credit risk, measured by CDS spreads, in the Eurozone. The study focuses on the interaction between two groups of nations, ‘cores’ (Austria, Belgium, France, Germany and the UK) and ‘PIIGS’ (Portugal, Ireland, Italy, Greece and Spain), before and after these bailouts. We are able to control for the rating and other external influences affecting sovereign CDS spreads. There are three principal findings. (1) Before the EU interventions, the spreads of the rescued countries – Greece, Ireland, Portugal and Spain (PIGS) – had a strong influence on rating changes in Austria, Belgium, France, Germany and the UK (core European countries). (2) After bailout, our results underline increased interdependencies between sovereign credit risk in the EU area, especially between the rescued country and the core countries. This suggests that these bailout plans not only increase the influence of the rescued country on the development of the core nations, but also amplify the sensitivity of PIIGS to changes in the cores. (3) Different countries will vary in their financial stability and their fundamentals will differ, so they will be expected to respond differently to a bailout. Indeed, distinctive interaction behaviours across countries, related to country-specific characteristics (fiscal outlook), is found for each of the financial policy interventions. Second, to look at the correlation between variances, this study investigated correlation between 9 major EMU countries’ CDS markets during the sovereign debt crisis, and hence examined the impacts of policy interventions on these markets, using the DCC-GARCH model. The main purpose was to assess the extent to which the policy interventions influenced the dynamics of correlations in sovereign CDS markets, after controlling for international influence (US VIX), and both domestic and foreign sovereign credit rating and outlook. Our results suggest that correlations are time-varying for all the sample countries. Most of the policy interventions led to a significant increase in the pairwise correlations. Our interpretation is that the “two-way feedback” between the healthy country and the bailed-out country causes the public-to-public risk transfer. The increased debt and deficit partly result from assisting other troubled nations. Through policy interventions, any deterioration in the sovereign creditworthiness of the healthy countries could transmit back to the bailed-out countries. Moreover, the estimation result suggests that policy interventions, rather than VIX and credit rating/outlook, play the most direct and significant role in shaping the structure of dynamic correlation in the EMU markets.

My thesis attempts to examine the determinants of the cross-sectional stock returns. It mainly consists of three topics on the relation between consumption, stock liquidity, financial constraints, and expected returns. The first is "Transaction costs, liquidity risk, and the CCAPM". I examine how the consumption-based capital asset pricing model (CCAPM) performs with transaction costs and liquidity risk adjustments. Using the effective trading costs of Hasbrouck (2009) and the high-low spread estimates of Corwin and Schultz (2012) as proxies for transaction costs, I find that a liquidity risk-adjusted CCAPM explains a larger fraction of the cross-sectional return variations than that of the traditional CCAPM. I show that my liquidity risk-adjusted model gives more plausible risk aversion estimates than the CCAPM. The second is "The Liquidity risk adjusted Epstein-Zin model". In this chapter, I propose a liquidity risk adjustment to the Epstein and Zin (1989, 1991) model and assess the adjusted model's performance against the traditional consumption pricing models. I show that liquidity is a significant risk factor and it adds considerable explanatory power to the model. The liquidity-adjusted model produces both a higher cross-sectional R^2 and a smaller Hansen and Jagannathan (1997) distance than the traditional CCAPM and the original Epstein-Zin model. Overall, I show that liquidity is both a priced factor and a key contributor to the adjusted Epstein-Zin model's goodness-of-fit. The third is "Financial constraints, stock liquidity, and stock returns". I examine the different impacts of stock liquidity on the stock returns across financially constrained and unconstrained firms due to different levels of information asymmetry. My results show that financial constraints are highly correlated with liquidity and liquidity risk. More importantly, stock liquidity is a significant determinant of the cross-sectional stock returns for financially constrained firms, but it is insignificant for unconstrained firms. In addition, stock liquidity is a main driver of the different relations between financial constraints and stock returns. The liquidity premium accounts for the positive constraint premium, but it cannot be subsumed by the constraint premium.

This thesis was designed to examine two non-rational decision approaches in individual and team decision making. In Chapter 2 (Paper 1), a normative theory about how people should use intuition in making complex decisions is proposed. I draw from extant literature to derive why allowing intuition to interrupt analysis is beneficial to complex decision processes. In Chapter 3 (Paper 2), the theory of intuitive interruptions is applied to the entrepreneurial context. I argue that allowing intuitions to interrupt analysis helps entrepreneurs navigate the ambiguous environment in which they often find themselves. Chapter 4 (Paper 3) documents findings on the phenomenon of teams’ escalation of commitment and the effect of hope. According to the results, when faced with continuous negative feedback, teams that remain hopeful persist in the face of mounting costs. In Chapter 5 (Paper 4), changes in self-efficacy and team efficacy beliefs as responses to performance feedback were examined. The results indicated that the relationship between negative feedback and a decrease in efficacy beliefs is mediated by depressive realism—the negative yet realistic expectations of future outcomes. In summary, this thesis finds that non-rational approaches facilitate decision making by filling in the gaps, colouring the tone and changing the course of thinking where exhaustive information processing (i.e., full analysis) is not possible. Employing non-rational approaches can either be a deliberate choice or a reaction of human nature. Employing non-rational approaches does not necessarily yield favourable or unfavourable results. However, the analysis confirms that non-rational approaches are largely involved in complex decision making. Findings from this thesis add to our knowledge about how complex decisions are made by individuals and teams.

Chapter 1: Momentum Effects: G10 Currency Return Survivals The chapter analyses momentum effects in G10 currencies. For each of the currency crosses within the G10 universe the chapter models the “survival” probabilities of trading signals obtained from a wide set of dual crossover moving average combinations. The application of statistical tools that stem from survival time analysis sheds light on the subject of market efficiency within the currency market. Empirical momentum signals from shorter-term trading rules outlive respective benchmark signals, while longer-term moving average crossover signals have lower life expectancy than theory would suggest. Furthermore, a trading strategy constructed from a subset of short-term moving average signals exhibits clear outperformance over a trading strategy that is generically composed from all moving average crossover signals. This outperformance persists over time. Chapter 2: Momentum Effects: G10 Currency Return Survivals, Implications for Trading Rules The chapter models survival probabilities of positive and negative momentum signals that are obtained from a wide set of dual crossover moving average combinations for all G10 cross currency pairs. The results of this survival analysis are used to create trading rule enhancements that aim to outperform generic dual crossover moving average trading signals. The trading rule enhancements are assessed, by applying White’s (1999) “data snooper”. The results suggest that there is scope for trading rule enhancements to outperform generic trading rules. Moreover, results present strong evidence for Lo’s (2004) Adaptive Market Hypothesis. Chapter 3: Momentum effects: Dissecting Generic G10 Trading Rule Returns The chapter builds on the work of Pojarliev and Levich (2008, 2010), who dissect the returns of active currency managers by applying a multiple ordinary least squares (OLS) regression to currency fund returns. Where the chapter differs is in the specification of the dependent variable, which is in the context of the present chapter a set of trading rule parameterisations that are applied to a broad range of currency pairs. The results of this chapter suggest that there is some alpha embedded in the returns of technical trading rules. The chapter also establishes a comparatively strong positive, statistically significant link between the risk factors Trend, Momentum, Risk Aversion. The results of the chapter clearly indicate that shorter-term moving averages exhibit less systematic exposure than longer term moving averages. Other factors such as Carry, Value and Volatility have a considerably less pronounced relationship; only few factor sensitivities are statistically significant. Moreover, the results also indicate that systematic risk exposures of trend following trading strategies change with small adjustments in the design of trading rules.

This thesis is divided in two main parts. Part A is focusing on assessing the ability of structural – form framework to predict the spreads and the prices in two different market regimes before and during the credit crisis. In Part B a 2 – factor model with local volatility for oil market is developed. For the first part three structural form models; Merton’s (1974), Leland – Toft (1996) and Longstaff – Schwartz (1995); were implemented using different assumptions for volatility and debt maturity (i) exogenous volatility and actual bond maturity, (ii) exogenous volatility and adjusted maturity, (iii) model determined volatility and actual bond maturity and (iv) model determined volatility and adjusted maturity. To our knowledge it is the first time that the model is calibrated against such four alternatives. Another novel feature of our work is the usage of historical implied volatility was used for equity. Results were in contrast with Lyden and Saraniti (2000) and Wei and Guo (1997) who argued that Merton’s model dominates Longstaff and Schwartz in predictive accuracy as Longstaff and Schwartz model revealed a very good performance. The encouraging results during the first period (January 1998 - April 2006) led to a very critical element of this research – the implementation of the Longstaff and Schwartz (1995) model on 2007 – 2008 bond data. The assumption of simple capital structure is relaxed and a composite implied volatility is calculated. Again the model indicated very good performance in all cases proving an average predicted over actual credit spread ratio of 57%. The second part of this research proposes a 2 – factor model with local volatility to price Oil Exotic Structures. The proposed approach utilizes the general multi – factor model framework and the interest ate modeling developments as described by Clewlow and Strickland (1999b) and Brigo and Mercurio (2006) respectively. The model has the flexibility to generate different local volatility surfaces depending on the calibrated data. Moreover the model allows different correlation surface. The model is used to price a number of exotic structures – barrier options, Target Redemption Notes and European and Bermudan Swaptions – that are common in the oil market. Based on the results it is clear that being able to capture the smile dynamics is very important not only for valuation reasons but also for risk management purposes. The model can be calibrated directly and match market traded instruments such us swaptions and monthly strip options.