This paper investigates a potential cause of the observed growth in the magnitude of earnings response coefficients over time since 2001. I hypothesize that the growth is explained by increasing investor reliance on Wall Street analyst earnings per share (“EPS”) estimates to form their next-period EPS expectations. To test my hypothesis, I regress 3-day cumulative abnormal market returns following earnings announcements on an interaction term between the earnings surprise and the number of analyst EPS estimates along with several control variables. I ultimately find no evidence of increasing investor reliance on Wall Street analyst estimates. Furthermore, I fail to replicate the results of prior literature that found an upward trend in earnings response coefficients over time from 2001 to 2011. These contradictory results merit further investigation in future research.

This study investigates the settlement period, including payment delays and failed deliveries that occur during the processing of U.S. equity transactions, and its effects on observed stock prices. Payment and delivery occur three to six calendar days after the trade date in the standard three business day settlement cycle, referred to as T+3. First, the buyer benefits from a payment delay, during which time he can earn interest on the cash needed to settle the trade. Since the seller has no analogous opportunity, I anticipated that the cost of the payment delay would be reflected in equity prices at a rate equivalent to the risk-free rate over the settlement period in ordinary circumstances and at a higher rate during financial market crises if sellers believe they may not be paid on time. Using CRSP daily market index returns from 1995 through 2009, I measured the cost of this delay to be approximately three to five times the risk-free rate, proxied by the effective Fed funds rate. These results suggest that buyers are forced to compensate sellers at rates greater than I expected during normal conditions. Second, the risk of failed delivery may also affect security prices if market participants expect that sellers will not deliver securities on time. A failed delivery effectively becomes a forward transaction. I predicted that buyers compensate sellers at the risk-free rate over the extended settlement period. This compensation would be in addition to the normal payment delay and directly related to the probability of failed delivery; thus, I added SEC Regulation SHO daily failed deliveries data, available from 2004 through 2009, to the model with payment delays. By constructing a proxy for the change in probability of failure from aggregated fails and market volume, I found that buyers compensate sellers over the lengthened settlement period due to failed deliveries at a rate of approximately 11 basis points daily for an increase in the likelihood of failure of one percentage point.

Non-arbitrage asset pricing has been an avenue of unending interest to financial academics and practitioners alike. With increased capital outflow being permitted by developing economies, investors now have easy access to securities issued by foreign firms. The issue investigated in this research is concerned with the persistent presence of arbitrage opportunities between depository receipts and domestic stocks of Indian firms during the recent financial crisis. Instead of being priced in parity with one another during the crisis, ADRs of Indian firms were overpriced by as much as 70% for months on end. This thesis investigates the reasons giving rise to this premium by analyzing causes like benefits from diversification and liquidity.

Bitcoins have the potential to fundamentally change the way value is transferred globally. Their rapid adoption over the past four years has led many to consider the possible results of such a technology. To be a viable currency, however, it is imperative that the market for trading Bitcoins is efficient. By examining the changes in availability of predictable outsized returns and market liquidity over time, this paper examines historical Bitcoin market efficiency and establishes correlations between market liquidity, price predictability, and return data. The results provide insight into the turbulent nature of Bitcoin market efficiency over the past years, but cannot definitively measure the magnitude of the change due to the limitations in efficiency analysis. The most meaningful result of this study, however, is the statistically significant short-horizon price predictability that existed over the duration of the study, which has implications for Bitcoin market efficiency as well as for continued research in short-horizon Bitcoin price forecasting models.

This paper empirically explores how the introduction of Credit Default Swap (CDS) trading affects firm systematic risk. By treating the introduction as an event study and imploring propensity score matching and difference-in-differences analysis, this research finds that firm exposure to market risk increases after the introduction of CDS instruments, controlling for higher debt levels. These findings change, however, in times of financial crisis when the impact of CDS trading actually reduces systematic risk. These results show that CDS introduction enables a firm to more dramatically change its exposure to systematic risk in comparison to its counterpart to reflect market conditions.

The Fama and French five-factor model is molded into a smart beta investment strategy with strong exposure to the profitability factor. This constructed portfolio outperforms the market significantly despite an unintentional negative correlation with profitability that can be attributed to the intra-factor return correlations. The second portfolio, constructed by investing directly in profitability as represented by gross profit over total assets, outperforms both the market and the first portfolio.

This study examines the Chicago Board Option Exchange (CBOE) Volatility Index (VIX) which is the implied volatility calculated from short-term option prices on the Standards & Poor’s 500 stock index (S&P 500). Findings suggest VIX overestimates average volatility by approximately 3% but explains 55% of S&P 500’s proceeding month’s volatility. The implied volatility (IV) from options on the VIX add additional explanatory power for the S&P’s 500 proceeding kurtosis values (a measure of tail risk). The VIX option’s volatility smirks did not add additional explanatory power for explaining the S&P 500 volatility or kurtosis. A simple trading rule based on buying the S&P 500 whether the VIX, IV from the options on the VIX, and the VIX option’s volatility smirk decline over the preceding month results in an additional 0.96% return in the following month. However, this only occurs approximately 10% of the time and does not outperform a simple buy-and-hold strategy as the strategy has the investor out of the market the majority of the time.

This dissertation consists of two parts. In the first chapter, we examine the relative performance of four options-based investment strategies versus a buy-and-hold strategy in the underlying stock. Specifically, using ten stocks widely held in 401(k) plans, we examine monthly returns from strategies that include a long stock position as one component. These strategies are long stock, covered call, protective put, collar, and covered combination. Ignoring early exercise for simplicity, we find that the covered combination and covered call strategies generally outperform the long stock strategy, which in turn generally outperforms the collar and protective put strategies regardless of the performance measure considered. Clearly, from the first chapter, strategies that involve writing options, in general, outperform the ones buying options. The second chapter provides a detailed study of the conditions where option writers can maximize returns while minimizing risk. The nonlinear nature of time value decay in options suggests that, theoretically, holding short positions only when the speed of time decay is high might improve the performance of option writing strategies. We examine monthly returns from five option strategies without a position in the underlying asset. These strategies are: short straddle, short strangle, short guts, “crash-neutral” short straddle, and long iron butterfly. The results from two portfolios are compared: a “benchmark” portfolio using standard SPX options that expire the following month and a weekly portfolio using SPXW options that expire at the end of the weekly holding period. The short strangle strategy with weekly options consistently outperforms the other strategies with both standard and weekly options, even after accounting for transaction costs. This finding suggests that short-dated out-of-the-money options can be useful in improving the risk-return characteristics of an option writing strategy. In an effort to improve the performance of the short straddle strategy, this chapter introduces an extremely short holding period portfolio, by stitching together three weekly option expirations into one week. Although the straddle still underperforms relative to the short strangle, the performance of the short straddle is improved by entering the market 15 minutes before the close and by using the extremely short holding period portfolios.

The first part of this dissertation examines the impact of financial development on different countries holdings of U.S securities. The difference between the US weight in the global market capitalization and the US weight in developed and developing countries is tested through a panel data analysis. We find that most countries tend to overweight their US debt portfolio which is strongly related to their financial market development. When holdings of US debts and equity are low, financial market development is high; in developing countries, holding less US equity in their portfolio causes country to get better financial development. In developed countries there is no causation effect; a simple negative relation between financial development and countries holding of US securities is observed and countries tend to hold relatively less US securities through years. The second part of this dissertation examines whether economic conditions, affect carve-outs frequency and returns. This paper investigates the effect of expansion and recession, and industry sectors on carve out issued in the US over 1982 to 2009. We find that the number of carve-outs is higher in expansion than recession. However, the cumulative abnormal returns are higher during recession which is explained by the higher adverse selection during this period. Further, we find that the difference of abnormal returns between expansion and recession is significant and we also observe that high-tech or non-high-tech industries that undertake carve-out have positive higher abnormal return during recession. Therefore, within a same industry sector, carve-out abnormal returns are impacted by the economy cycle. However difference of abnormal returns between industry sector, high-tech and non-high-tech industries, is not significant.

This study examines the use of leveraged exchange traded funds (LETFs) within a portfolio insurance framework to reduce exposure to downside risk. Investors have learned the importance of mitigating this risk having experienced two “once in a century” events in the last 20 years with the tech crash in the early 2000s and the financial crisis in 2008. Current portfolio insurance strategies are either option based (Leland & Rubinstein, 1976) or constant proportional portfolio insurance (CPPI), (Black & Jones, 1987). The cost of option based strategies can be quite high while a CPPI strategy requires constant rebalancing. This study combines the advantages of each by using LETFs to attain the leverage options provide, while at the same time allowing a greater percentage of the portfolio to be invested in bonds since a position in LETFs relative to a typical market index magnifies equity exposure. Thus, where a standard CPPI strategy may require 50% of the portfolio to be invested in equities, using a 3x LETF only requires approximately 16.7%. Results suggest the use of LETFs within a portfolio insurance framework result in better returns, higher Sharpe, Sortino, Omega, and cumulative prospect values while reducing Value at Risk (VaR) and Excess Shortfall below VaR. This twist on the use of LETFs will be of interest to any investor concerned with mitigating downside risk while allowing participation in increasing markets.