The objective of this study is to answer the following research question: How large is a diversified portfolio? Although previous work is abundant, very little progress has been made in answering this question since the seminal work of Evans and Archer (1968). This study proposes two approaches to address the research question. The first approach is to measure the rate of risk reduction as diversification increases. For the first approach, I identify two kinds of risks: (1) risk that portfolio returns vary across time (Evans and Archer (1968), and Campbell et al. (2001)); and (2) risk that returns vary across portfolios of the same size (Elton and Gruber (1977), and O'Neil (1997)). I show that the times series risk reaches an asymptote as portfolio size increases. Cross sectional risk, on the other hand, does not appears to reach an asymptote as portfolio size increases. The second approach consists of comparing portfolios' performance to a benchmark portfolio that is assumed to be diversified (Statman (1987)). I develop a performance index. The performance index is calculated, for any given test portfolio, as the ratio of the Sharpe-like measure of the test portfolio to the Sharpe-like measure of the benchmark portfolio that is assumed to be diversified. The index is based on the intuition that an increase in portfolio size reduces times series risk and cross sectional risk, and increases transaction costs. Portfolio size is worth increasing as long as the marginal increase in the performance index from a decrease in risk is greater than the marginal decrease of the performance index from an increase in transaction costs. Diversification is attained when the value of the index reaches one. The results of my simulations indicate that the size of a well diversified portfolio is at the very least 30. This number can be substantially higher if, for example, the investment horizon length, the benchmark portfolio, and/or the cost of investing in the benchmark portfolio are changed. The active diversification strategy considered in this study, which consists of optimizing randomly selected portfolios, does not seem to produce smaller diversified portfolios. This result supports the market efficiency hypothesis.

This dissertation consists of three chapters covering the following topics in firm value and volatility: valuation of agency cost, valuation of the underpricing in IPOs and the idiosyncratic volatility of public firms. In Chapter 1, I briefly introduce three topics studied in my dissertation. In addition, I summarized the stochastic frontier model which is employed in the study of valuation of agency cost and the underpricing in IPOs. In Chapter 2, I extend the agency cost literature multifold. First, by using the data of the 1,500 S&P Super Composite Index Constituents for 1994-2011, I estimate firm-level agency cost and the uncertainty in firm's maximum benchmark value, respectively, as the mean and variance of the inefficiency term conditional on the composed error. The estimation results reveal that, on average, a sample firm is around 18% and 15% below its optimal value for the period 1994-2006 and 2007-2011 respectively. The variances of the inefficiency term are 0.01 and 0.001 for two periods respectively. Second, using this measure of uncertainty, I construct the confidence interval for the agency cost of each firm. Third, a new concept called Coefficient of Uncertainty of Market Value due to the principal-agent problem (CUMV) is defined and calculated, which measures uncertainty in the benchmark value per unit of agency cost. Finally, I decompose the change in market value of a firm into three components, i.e. change due to agency cost; change due to operational efficiency, and change due to the evaluation of the whole market (called the market effect). I find that the reduction of agency cost and the expansion of the whole market do contribute to firm growth, but the majority of the growth for the sample firms is explained by the improvement of firms' operational efficiency. In chapter 3, I estimate the magnitude of the underpricing of the initial public offering (IPO) for 338 firms during 2001-2010 under the framework of Stochastic Frontier Approach. The magnitude of the underpricing in IPOs and the uncertainty in IPOs' maximum benchmark value are estimated as the mean and variance of the inefficiency term conditional on the composed error respectively. I note that the new issues of a firm with initial offering in US between 2001 and 2010, on average, fall short of 22.9% of their optimal value with a variance of 0.63. As an extension of existing literature, I do not only estimate the frontier model, but investigate the determinants of the underpricing of the IPOs. The estimation results support the fact that the underpricing would be lower if the firms have more reputable underwriters, more insider ownership and higher age at the time of offering new issues. Finally, I introduce a new concept, the Coefficient of Uncertainty of Firm Value due to the underpricing in the IPOs (CUV), which reports the firm value uncertainty for each unit of the underpricing in IPOs. I observe that, on average, the CUV is 4.21 for a sample firm, which implies that firm's uncertainty is indeed sensitive to the underpricing in IPOs. In chapter 4, I investigate the idiosyncratic volatility and its relation to executive ownership during 1992 to 2011. The ownership of executives is employed as the proxy for the behavior of executives to study how executives influence firms' idiosyncratic volatility. Inconsistent with the previous literature, I don't find upward trend of the aggregated idiosyncratic volatility during 1992 to 2011. Instead, I observe that the aggregated idiosyncratic volatility exhibits indeterministic pattern during this period. Moreover, I also note that the reverts of aggregated idiosyncratic volatility occur at a time of the US stock market crash in 2000 and the period of most recent recession (2008-2009). The most interesting finding of this study is that although the idiosyncratic volatility increases in executives' ownership, the idiosyncratic volatility's growth rate is not always positive related with executives' ownership. In Chapter 5, I conclude this dissertation.

Thesis advisor: Zhijie Xiao / My dissertation research examines empirical issues in financial economics with a special focus on the application of quantile regression. This dissertation is composed by two self-contained papers, which center around: (1) robust estimation of conditional idiosyncratic volatility of asset returns to offer better understanding of market microstructure and asset pricing anomalies; (2) implementation of coherent risk measures in portfolio selection and financial risk management. The first chapter analyzes the roles of idiosyncratic risk and firm-level conditional skewness in determining cross-sectional returns. It is shown that the traditional EGARCH estimates of conditional idiosyncratic volatility may bring significant finite sample estimation errors in the presence of non-Gaussianity, casting strong doubt on the positive intertemporal idiosyncratic volatility effect reported in the literature. We propose an alternative estimator for conditional idiosyncratic volatility for GARCH-type models. The proposed estimation method does not require error distribution assumptions and is robust non-Gaussian innovations. Monte Carlo evidence indicates that the proposed estimator has much improved sampling performance over the EGARCH MLE in the presence of heavy-tail or skewed innovations. Our cross-section portfolio analysis demonstrates that the idiosyncratic volatility puzzle documented by Ang, Hodrick, Xiang and Zhang (2006) exists intertemporally, i.e., stocks with high conditional idiosyncratic volatility earn abnormally low returns. We solve the major piece of this puzzle by pointing out that previous empirical studies have failed to consider both idiosyncratic variance and individual conditional skewness in determining cross-sectional returns. We introduce a new concept - the "expected windfall" - as an alternative measure of conditional return skewness. After controlling for these two additional factors, cross-sectional regression tests identify a positive relationship between conditional idiosyncratic volatility and expected returns for over 99% of the total market capitalization of the NYSE, NASDAQ, and AMEX stock exchanges. The second chapter examines portfolio allocation decision for investors with general pessimistic preferences (GPP) regarding downside risk aversion and out-performing benchmark returns. I show that the expected utility of pessimistic investors can be robustly estimated within a quantile regression framework without assuming asset return distributions. The asymptotic properties of the optimal portfolio weights are derived. Empirically, this method is introduced to construct the optimal fund of CSFB/Tremont hedge-fund indices. Both the in-sample and out-of-sample backtesting results confirm that the optimal mean-GPP portfolio outperforms the mean-variance and mean-conditional VaR portfolios. / Thesis (PhD) — Boston College, 2009. / Submitted to: Boston College. Graduate School of Arts and Sciences. / Discipline: Economics.

This dissertation examines three topics in macroeconomics. The first chapter studies the impact of severance payments on employment when firms can subcontract as a substitute for hiring workers. In countries with strict job security regulations firms use flexible staffing arrangements to buffer the regular workforce from economic fluctuations and avoid workers' firing costs. I set up a general equilibrium model in the tradition of Hopenhayn and Rogerson (1993) where firms can hire two types of workers: subcontractors that are totally flexible, and permanent workers that entail firing costs that increase with seniority in the job. Both types are perfect substitutes in production, but permanent workers are relatively less expensive as subcontractors' charges are higher than the firm's own production costs. I estimate the model using a simulated method of moments by fitting employment growth dynamics of Chilean manufacturing plants. I find that allowing firms to subcontract workers increases output, employment and productivity. This effect is stronger on output as subcontracted workers allow firms to respond more aggressively to productivity shocks, which enhances the allocation of labor across firms and hence total factor productivity (TFP). When firms can subcontract, the negative effects of firing costs are less than previously estimated in the literature. The second chapter analyzes the effects of capital adjustment costs on quantity dynamics and asset prices in a real business cycle model when the representative agent has Epstein-Zin preferences. Capital adjustment costs make it costly for agents to smooth fluctuations in consumption through the production sector, inducing them to take more consumption risk. I show this model accounts for the main statistical features of macroeconomic aggregate quantities. At the same time, adjustment costs increase the equity risk premium, with the mean stock return and its standard deviation in the order of magnitude consistent with the data. The model also produces a stable risk-free rate, and comes close to matching its average return. Finally, the third chapter (with Shuheng Lin) empirically examines the contribution of firm-level idiosyncratic shocks to aggregate fluctuations in the US, Germany, Canada, and the UK. We find shocks to large firms are of little relevance in the UK or Canada, but roughly explain one third of output fluctuations in the US and Germany. We argue the ability of the largest firms to transmit shocks is not universal, even when the firm size distribution is highly skewed as the theory suggests (Gabaix, 2011).

This thesis consists of three main empirical chapters on the effect of stock liquidity on exchange markets. The first (Chapter 2) investigates the pricing ability of an illiquidity measure, namely the Amihud measure (Amihud, 2002), in different sample periods. The second (Chapter 3) determines the causal link between two well-known market quality factors liquidity and idiosyncratic volatility adopting two-stage least squares methodology (2SLS). The last empirical chapter (Chapter 4) revisits the limits to arbitrage theory and studies the link between stock liquidity and momentum anomaly profit, employing the difference-in-differences approach. The overall contribution of this thesis is to employ causal techniques in the context of asset pricing in order to eliminate potential endogeneity problems while investigating the relation between stock liquidity and exchange markets. Chapter 2 investigates whether the Amihud measure is priced differently if the investor is optimistic or, conversely, pessimistic about the future of the stock markets. The results of the chapter show that Amihud measure is priced in the low-sentiment period and that there is illiquidity premium when investor sentiment is low. Chapter 3 studies whether a change in stock liquidity has an impact on idiosyncratic volatility, employing causal techniques. Prior studies investigate the link between liquidity and idiosyncratic volatility but none focus on the potential problem of reverse causality. To overcome this reverse causality problem, I use the exogenous event of decimalisation as an instrumental variable and employ two-stage least squares approach to identify the impact of liquidity on idiosyncratic volatility. The results of the chapter suggest that an increase in illiquidity causes an increase in idiosyncratic volatility. As an additional result, my study shows that reduction in the tick size as a result of decimalisation improves firm-level stock liquidity. Chapter 4 examines whether liquid stocks earn more momentum anomaly profits compare to illiquid stocks, using the implementation of different tick sizes for different price ranges in the American Stock Exchange (AMEX) between February 1995 and April 1997. This programme provides a plausibly exogenous variation to disentangle the endogeneity issue and allows me to examine the impact of liquidity on momentum, by clearly exploiting the difference-in-difference framework. The results of the chapter show that liquid stocks earn more momentum profit than illiquid stocks.

13-Cis-retinoic acid (13-cis-RA) is a synthetic retinoid and the active ingredient in the oral acne treatment Accutane. The medical literature has suggested that the use of 13-cis-RA for acne treatment can induce depression, but because acne itself can have a negative psychosocial impact on self esteem, whether or not 13-cis-RA can cause depression remains controversial. The purpose of this work was to examine whether chronic 13-cis-RA administration could induce depression-related behaviors in mice and to determine the impact 13-cis-RA has on regions of the brain thought to be associated with mood and depression. We found that chronic treatment of adolescent male mice with 13-cis-RA induced depression-related behaviors, as assessed by immobility in the tail suspension and forced swim tests. Although depression is a multifaceted disease in which many brain regions are involved, the regions that seem particularly vulnerable to the effects of 13-cis-RA are the serotonergic and hippocampal systems. In serotonergic cells in vitro, 13-cis-RA treatment increases protein levels of the serotonergic 5-HT[subscript 1A] autoreceptor and the serotonin reuptake transporter (SERT), two inhibitory components of serotonin (5-HT) signaling. In vivo, the median and dorsal raphe nuclei contain the main 5-HT producing cells. 13-Cis-RA uncoupled the functional connectivity of dorsal raphe nuclei from the hippocampal regions as measured by interregional correlations of cytochrome oxidase (CO) activity, a metabolic marker of neuronal activity. Decreased hippocampal neurogenesis is thought to occur in depression and is decreased by 13-cis-RA. 5-HT is also a known regulator of hippocampal neurogenesis. Uncoupling of the dorsal raphe nuclei from the regions of the hippocampus by 13-cis-RA treatment may be the cause of, or a result from, the decreased neurogenesis. Although retinoids are known regulators of apoptosis, the uncoupling of the dorsal raphe nuclei from the hippocampal regions was not due to serotonergic cell loss. Interestingly, 13-cis-RA treated animals with the lowest CO activity in the dentate gyrus have the highest immobility in the tail suspension and forced swim tests. Ultimately, the effects of 13-cis-RA on the serotonergic and hippocampal systems might be inducing depression-related behaviors. / text

Thesis (Ph. D.)--University of Texas at Austin, 2008. / Vita. Includes bibliographical references.

Thesis (Ph. D.)--Michigan State University. Dept. of Pharmacology and Toxicology, 2008. / Title from PDF t.p. (viewed on July 23, 2009) Includes bibliographical references (p. 278-302). Also issued in print.

Thesis (Ph. D.)--University of California, San Diego and San Diego State University, 2007. / Title from first page of PDF file (viewed May 29, 2007). Available via ProQuest Digital Dissertations. Vita. Includes bibliographical references (p. 57-65).

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