The first essay examines the joint determination of the contract for a private equity (PE) fund manager and the equilibrium risk premium of the PE fund. My model relies on two realistic features of PE funds. First, I model agency frictions between PE fund's investors and manager. Second, I model the illiquidity of PE fund investments. To alleviate agency frictions, compensation to the manager becomes sensitive to the PE fund performance, which makes investors excessively hold the PE fund to hedge the manager's fees. This induces a negative effect on the risk premium in equilibrium. For the second feature, I add search frictions in the secondary market for PE fund's shares. PE fund returns also contain a positive illiquidity premium since investors internalize the possibility of holding sub-optimal positions in the PE fund. Thus, my model delivers a plausible explanation for the inconclusive findings of the empirical literature regarding PE funds' performance. Agency conflicts deliver a lower risk-adjusted performance of PE funds, while illiquidity risk can raise it. In the second essay, coauthored with Andrew Ang and Pierre Collin-Dufresne, we investigate how often investors should adjust asset class allocation targets when returns are predictable and updating allocation targets is costly. We compute optimal tactical asset allocation (TAA) policies over equities and bonds. By varying how often the weights are reset, we estimate the utility costs of different frequencies of TAA decisions relative to the continuous optimal Merton (1971) policy. We find that the utility cost of infrequent switching is minimized when the investor updates the target portfolio weights annually. Tactical tilts taking advantage of predictable stock returns generate approximately twice as much value as those market-timing bond returns. In the third essay, also coauthored with Andrew Ang and Pierre Collin-Dufresne, we revisit the question of a pension sponsor's optimal asset allocation in the presence of a downside constraint and the possibility for the pension sponsor to contribute money to the pension plan. We analyze the joint problem of optimal investing and contribution decisions, when there is disutility associated with contributions. Interestingly, we find that the optimal portfolio decision often looks like a ``risky gambling" strategy where the pension sponsor increases the pension plan's allocation to risky assets in bad states. This is very different from the traditional prediction, where in economy downturns the pension sponsor should fully switch to the risk-free portfolio. Our solution method involves a separation of the pension sponsor's problem into a utility maximization problem and a disutility minimization one.

This thesis studies the equilibrium behavior of continuous-time capital markets with various market assumptions. These assumptions include different settings of the investment opportunity set and consideration of the variability of the number of shares outstanding of stocks and the investment horizons of investors. Two capital asset pricing models (CAPMs) are established for every case. One of these CAPM focuses on the study of the relationship between the terminal rate of return of any given portfolio and the benchmark portfolios. The other CAPM focuses on the instantaneous rate of return. The market portfolios (and their substitutes for some cases) of all market situations are explicitly derived given homogeneous expectations. The mean-variance efficiencies with a specific terminal time are then investigated. It is proved that some of these market portfolios must be inefficient for a non-zero investment horizon. Moreover, the instantaneous efficiency of portfolios is studied for some market situations. The CAPMs are then developed based on the conditions of each market situation. / Chiu Chun Hung. / "December 2003." / Adviser: Xun Yu Zhou. / Source: Dissertation Abstracts International, Volume: 64-11, Section: A, page: 4147. / Thesis (Ph.D.)--Chinese University of Hong Kong, 2003. / Includes bibliographical references (p. 185-187). / Electronic reproduction. Hong Kong : Chinese University of Hong Kong, [2012] System requirements: Adobe Acrobat Reader. Available via World Wide Web. / Electronic reproduction. Ann Arbor, MI : ProQuest dissertations and theses, [200-] System requirements: Adobe Acrobat Reader. Available via World Wide Web. / Electronic reproduction. Ann Arbor, MI : ProQuest Information and Learning Company, [200-] System requirements: Adobe Acrobat Reader. Available via World Wide Web. / Abstracts in English and Chinese. / School code: 1307.

Fu, Hoi Man. / Thesis (M.Phil.)--Chinese University of Hong Kong, 2009. / Includes bibliographical references (leaves 31-34). / Abstract also in Chinese.

Abstract not available

Research in this thesis deals with some unexplored, or only partially explored, issues relating to the information content of volatility of the idiosyncratic component of asset returns at the firm and industry-level, both in the context of developed and emerging stock markets. Specific issues we have investigated include potential role of idiosyncratic volatility of equity returns for the explanation of future stock market volatility, aggregate economic activity, cross-border information transmission, and fundamental efficiency of stock prices. Chapter 2 of the thesis presents research into the information content of firm and industry-level idiosyncratic volatility, estimated as cross-sectional volatility (CSV), for future market-level volatility in Australia. We find that CSV does contain information beyond what is already contained in the lagged market-level return shocks and has a significant positive relationship with conditional market volatility. Our analysis gives new empirical evidence that the effect of CSV is stronger in relatively stable market conditions than in more volatile market conditions. We also examine how the information content of stock turnover and aggregate company announcements compares with that of CSV, and take a novel data-driven approach to verify whether CSV captures any information about multiple common factor shocks in asset returns. The explanatory power of CSV for future market volatility remains robust even after controlling for the effects of stock turnover, company announcements and omitted factor shocks in returns. These results are in line with the theoretical models relating volatility to the flow of information to the market, and suggest that the amount of information as captured by the firm and industry-level CSV shares a common co-movement with the market-wide information flow. In Chapter 3, unlike most other studies investigating the role of macroeconomic aggregates in explaining the fluctuations in stock market returns, we consider the possibility of reverse causality, and that using idiosyncratic volatility of industry-level stock returns in the context of Australia. Both the theories of investment and consumption under uncertainty and the models of sectoral reallocation provide rationale for the analysis. By explicitly modeling the cyclical patterns of industry-level volatility and relating it to corresponding cyclical behaviour of macroeconomic variables, we show that industry-level volatility is a leading indicator of the cyclical movements in output growth and inflation in Australia. We find complementary evidence from the multi-step Granger causality test and the impulse response analysis based on a vector autoregression of industry-level volatility, GDP growth, inflation and changes in unemployment rate. However, the forecast error variance decompositions suggest that although the industry-level volatility accounts for a significant fraction of the forecast error of inflation, this explains only a small fraction of output and unemployment uncertainties. Further analysis indicates that industry-level volatility contains better information about the future state of the economy than does aggregate stock market volatility. In Chapter 4, we explore a new but potentially important channel of crossborder information transmission between international stock markets ���� idiosyncratic volatility of stock returns. Specifically, we analyze the role of US and Japanese idiosyncratic volatility in transmitting information across three smaller but advanced Asia-Pacific stock markets – Australia, Hong Kong and Singapore. We find that, similar to cross-market first and second moment return correlations, market-wide measures of IV are also highly correlated across countries. The effect of US and Japanese IV information is found to be much stronger on cross-market conditional volatility process than on the returns process. Further, we find significant contemporaneous and dynamic information transmission from IV of the US and Japan to the trading volume of other stock markets. Transmission of IV information, in general, seems to have gained momentum in the period since the Asian crisis of 1997. Overall evidence presented in this chapter is consistent with the interpretation that IV may contain information about some unobservable factors driving international stock market co-movement. In Chapter 5, we make the first attempt to understand the direct relationship between firm-specific variations in returns and firm fundamentals by analyzing firmlevel micro panel data in the context of each of a set of emerging Asian stock markets. After properly accounting for unobserved firm-specific effects, volatility persistence and potential endogeneity bias, we find that firm-specific variation of stock returns is highly correlated with, and is significantly explained by, alternative proxies of firm-specific variation of fundamentals in a majority of the emerging markets in Asia. Further analysis reveals that the observed effect of firm-specific fundamentals variation on returns variation is not indirectly driven by some other factors known to affect stock return volatility, viz., firm size, stock turnover, and leverage. Consistent with the rational approach, these results suggest that stock prices in majority of the Asian emerging markets are not devoid of fundamentals. / Doctor of Philosophy (PhD)

The explanatory power of six asset-pricing models are tested and compared in this study. The models include the four known asset pricing models: the CAPM, the Fama and French's (1996) Three-Factor model, the Carhart's (1997)'s Four-Factor model, a model similar to Zepeda's (1999) Five-Factor model. Additionally, it includes two new models - the Five-Factor-Volume (5F-V) model and the Six-Factor model, which are developed in line with Ross's (1976) Arbitrage Pricing Theory.

The study is concerned with the conception of capital and income in the changing economic circumstances of the late nineteenth century. This issue arises as a matter of interest from the confusing accounting for capital assets then followed, and which has become the subject of a small but significant literature. Methodologically the issue, and the literature it has provoked, provide a 'set' in which an accounting calculation is identified, its context considered and consequences evaluated. It introduces the idea that accounting had macroeconomic implications, and meets Hopwood's (1983) injunction that accounting ought to be considered in the context in which it arises. The study illustrates the significance of a flawed accounting founded on an inadequate definition of capital to adversely affect economic life by reference to the legal debate and litigation in English courts about the definition of profit available for distribution as dividends that occurred at the end of the nineteenth century. The study explores nineteenth century understanding of the concept of capital in economic philosophy on the basis that it would be in that body of philosophic literature that such ideas would have to be examined. The study finds that, for most of the nineteenth century, understanding of the nature of capital and income derived from the works of William Petty and Adam Smith. It held that capital and income were separate states of wealth. This conception of capital continued in the work of David Ricardo, Marx and J. S. Mill, and is evident also in the work of Alfred Marshall. The modern, twentieth century, understanding of capital and income as antithetical states of wealth is identified in the study as deriving from the work of the American economist Irving Fisher in 1896. The contribution of this thesis is to • Establish that the crisis in late nineteenth century financial reporting derived from the prevailing conception of capital and its relationship to income, • note that the conception in legislative requirements determining profit were consistent with that definition, and • identify the origin of the modern, twentieth century understanding of capital and income as antithetical states of wealth. The study provides an in-principle view that nineteenth century capital accounting had the capacity to cause misallocation of resources within an economy.

High dimensional covariance matrix estimation is considered in the context of empirical asset pricing. In order to see the effects of covariance matrix estimation on asset pricing, parameter estimation, model specification test, and misspecification problems are explored. Along with existing techniques, which is not yet tested in applications, diagonal variance matrix is simulated to evaluate the performances in these problems. We found that modified Stein type estimator outperforms all the other methods in all three cases. In addition, it turned out that heuristic method of diagonal variance matrix works far better than existing methods in Hansen-Jagannathan distance test. High dimensional covariance matrix as a transformation matrix in generalized least squares is also studied. Since the feasible generalized least squares estimator requires ex ante knowledge of the covariance structure, it is not applicable in general cases. We propose fully banding strategy for the new estimation technique. First we look into the sparsity of covariance matrix and the performances of GLS. Then we move onto the discussion of diagonals of covariance matrix and column summation of inverse of covariance matrix to see the effects on GLS estimation. In addition, factor analysis is employed to model the covariance matrix and it turned out that communality truly matters in efficiency of GLS estimation.

We analyze four alternative energy mutual funds using a multi-factor capital asset pricing model with generalized autoregressive conditionally heteroskedastic errors (CAPM-GARCH). Our findings will help portfolio managers and others who seek to predict the return on investment in alternative energy firms. We find that alternative energy firms tend to be riskier than the general US stock market, have a low, but significant and positive response to oil prices, and have a significantly high and negative response to the value of the dollar relative to other currencies. Our results also suggest that alternative energy firms should hedge against currency exchange rate fluctuation.

Thesis (M.S.)--University of North Carolina Wilmington, 2009. / Title from PDF title page (February 17, 2010) Includes bibliographical references