The fundamental paradigm of asset pricing is changing fast. Over time financial economists have grown more accepting of incorporating human fallibility into formal asset pricing models. Today, many economists agree that the central task of asset pricing is to examine how expected returns are related to both risk and investor misvaluation as opposed to risk only. There is accumulating evidence that misvaluation can occur indirectly. In the presence of cross security effects, the risk and misvaluation associated with an asset are channeled not only to its own expected return but to the returns of other unrelated assets. With this in mind the focus of this dissertation is to examine such effects. Results from the dissertation suggest that pessimism associated with the returns on an asset can be channeled into the prices of and returns on an asset whose return distribution is not associated with pessimism. The price of the latter can be higher, lower, or remain unchanged as compared to its price under no pessimism. An empirical investigation of the effect of the return on a broad market index on the return on an index of gold stocks in the period January 1998 to April 2003 reveals that pessimism was directly channeled from the market into the index of gold stocks. Finally, results from the dissertation suggest that the existence of growth stocks affects the prices of and returns on value stocks. In the late 1990's the skyrocketing prices and valuations of the high growth companies formed a striking contrast to the considerably lower prices and valuations of more traditional companies. Analysis conducted with experimental data indicates that the trading prices of a value asset are generally higher in the presence of a growth asset that experiences positive updates in its fundamental value. In addition, lower prices observed in the growth market have a positive effect on the returns on value assets.

In the era of information technology, intellectual property assets are gaining important value and are becoming increasingly attractive in the sphere of commercial transactions. The case of software as collateral in the context of a financing transaction brings to the surface the various issues which a lender must face when engaging in an intellectual property-based secured transaction. / In the execution of such a transaction, the North-American intellectual property and secured financing legal regimes, currently in place, fail to procure the clear, certain and predictable results desired by lenders. / Whether at the initial stage of creation of a security interest on the software or in the final steps of its enforcement, these regimes do not reflect the commercial realities and necessities of the software industry, thereby increasing both challenges and risks for the lender. / The problems which the lender must face in the process of a software financing transaction will be examined through three Chapters. The first Chapter will focus on the creation and scope of a security interest on software, the second will examine its perfection and the third will address priority disputes involving competing interests in the software, as well as the enforcement of a security interest on software, both in the context of the debtor's default and in the event of its bankruptcy.

<p> The global crisis has turned the spotlight on the channels of shock transmission across countries, sectors, and markets. Particular emphasis has been placed on the role of interconnectedness and systemic vulnerabilities in the crisis propagation. The crisis has also rekindled efforts to re-examine the existing financial stability framework, which in many countries includes financial stability reports published by central banks with the aim to monitor systemic risks. I examine three questions that aim to broaden our understanding of the shock transmission channels during the crisis and the effectiveness of financial stability reports as a risk-monitoring tool: (1) What was driving the shock propagation in international interbank markets? (2) Are nonfinancial firms that operate in countries with banking problems more prone to financial distress? (3) Is there an empirical link between the publication of financial stability reports and financial stability?</p>

<p> This paper analyzes and characterizes the dynamics of wealth-share and equilibrium price in a stochastic general equilibrium model with heterogeneous consumers. The characterization enables a comparison between probabilistic learning and price evolution, revealing that prices incorporate "sparse" information efficiently. Results on wealth-share are obtained by comparing traders' optimal investment-consumption plans against their prices. This novel approach extends recent results in the literature by providing a condition that is necessary as well as sufficient for a trader to vanish. The results are applied to survival in iid, survival in large economies, and survival of traders that follow strategies commonly observed in real markets.</p>

<p> The global financial system appears to be heading for a major financial crisis. This crisis is being driven by a growing global debt. This crisis is not limited to nations that are heavily in debt such as Greece, Spain, Portugal, Ireland, Italy or Cyprus but to such others as the United States. While there has been a great deal of emphasis on debt, there are many other issues. In many cases, the underlying causes of this potential crisis are very complex. As this dissertation will show, it is the complexity of these causes and their interrelationships, coupled with a lack of a global financial management system that may be the real culprit in the potentially impending global financial crisis. </p><p> One very important aspect of these potential crises is the state of the world reserve currency and how it is managed. The concept of reserve currencies is widely recognized and these currencies are often used for international transactions. There is a very long history of the concept of a reserve currency. This history involves a combination of economic and political powers, real or perceived, that may influence global reserve currencies. </p><p> Recent years have witnessed a tremendous growth in information and communication systems that facilitate the design and implementation of complex inter-enterprise processes. The basic hypothesis of this dissertation is that an appropriately structured global reserve currency, based on use of an information and knowledge management system, can provide stability to currencies, whereas an unmanaged single or unstructured group of currencies will not provide currency stability. The proposed Information and Knowledge Architectures for System Management of a Global Reserve Currency (IKASM-GRC) can provide a system and methodology which can stabilize a reserve currency.</p>

This thesis explores money manager intertemporal arbitrage as an explanation of the liquidity effect. We develop a theoretical model of optimal portfolio adjustment by professional money managers, and show that they engage in intertemporal asset price arbitrage; they reduce their holdings of financial assets when they expect asset prices to fall, and increase their holdings when they expect prices to rise. Since a reduction in financial assets can only be accomplished through an increase in money holdings, a connection exists between intertemporal price arbitrage and speculative balances. We show that in equilibrium, money manager behavior causes market liquidity shocks to be accompanied by a form of asset price overshooting in which asset prices first rise above their long-run value and then slowly return as speculative balances are lent out to borrowers and absorbed into transactions balances. Such asset price overshooting is precisely the liquidity effect, stated in terms of asset prices rather than interest rates. This shadows the result established by Hartley (1990), who showed that the combination of sector-specific liquidity shocks and trading rigidities across sectors will cause general price overshooting in those sectors closest to the money supply injection. The second part of this thesis attempts to identify an empirical relationship between speculative balances and asset prices as a means of verifying the hypothesis that money manager intertemporal price arbitrage generates the liquidity effect. It is not possible to estimate this relationship on an aggregate level because no means exist to identify speculative balances relative to the total money supply. However, it is possible to test if individual money managers engage in intertemporal price arbitrage. We do so by estimating individual institutional investor demand for speculative balances. The data source we use is the Flow of Funds, which gives money holdings for various groups of institutional investors. We find an elasticity of 0.1 for speculative balances with respect to the stock market price-earnings ratio.

With the emergence and expansion of credit derivatives, which are financial instruments that are based on corporate bonds and provide their holders a protection against default, the importance of estimating probabilities of default has reached an unprecedented level. We have developed a Bayesian model to estimate term structures of conditional probabilities of corporate default, in an incomplete information setting. In such settings, investors do not have a complete picture of the economy nor of the true financial status of a firm. Therefore, we introduce a stochastic frailty to capture this unobservable source of uncertainty and to model default clustering. Frailty is found to have an impact on conditional default probabilities and on the default correlation between firms. The resulting values are well above those predicted by observable stochastic covariates: US interest rates, US Personal Income and a firm's distance-to-default.

Assessing the economic value of increasingly precise covariance estimates is of great interest in finance. We present a realized tick-time covariance estimator that incorporates cross-market tick-matching and intelligent sub-sampling. These features of the estimator offer the potential for improved performance in the presence of asynchroneity and market microstructure noise. Specifically, tick-matching preserves information when arrival structures are asynchronous, and intelligent sampling and averaging across sub-samples reduces microstructure-induced noise and estimation error. We compare the performance of this estimator with prevailing methodologies in a simulation study and by assessing out-of-sample volatility-timing portfolio optimization strategies. We demonstrate the benefits of tick time over calendar time, optimal sampling over ad-hoc sampling, and sub-sampling over sampling. Results show that our estimator has smaller mean squared error, smaller bias, and greater economic utility than prevailing methodologies. Our proposed optimized tick-time estimator improves upon both prevailing calendar-time methods and ad-hoc sampling schemes in tick time. Empirical results indicate substantial gains; approximately 70 basis points improvement against the 5 minute calendar time sampling scheme; approximately 80 basis points against optimally sampled calendar time; and 30 basis points against tick time sampled every 5th tick. Both simulation and empirical results indicate that tick time is the better sampling scheme for portfolios with illiquid securities. Asset allocation is inherently a high dimensional problem and estimated realized covariance matrices fail to be well-conditioned in high dimensions. As a result, the portfolios constructed are far-from optimal. Factor modeling offers a solution to both the growing computational complexity and conditioning of the covariance matrices. We find that risk averse investors would be willing to pay up to 30 basis points annually to switch from the best performing exponentially smoothed portfolio to the best performing single-index portfolio. As the number of assets increases, portfolio allocation using the single-index model is better able to replicate the benchmark index. For high-dimensional allocation problems, factor models are a more natural setting for employing realized covariance estimators.

This dissertation includes three essays on decision-making by boundedly rational economic agents. The first essay deals with decision-making by firms where decision-making is costly. The other two essays deal with decision-making by individuals. Taken together, the last two argue that decision-making is stochastic, and develop a stochastic model of decision-making reflecting that argument. In particular, the second essay does a detailed review of the psychological literature on estimating probabilities, and argues that the most successful explanation of the psychological results is that people's estimates are stochastic. Decision-making is costly, and so people use various heuristics to economize on the use of mental resources. The results suggest that the choice of heuristic may be partially random. The third essay builds on the second and develops an axiomatic model of choice, in the spirit of Savage (1954), in which individual's beliefs about the probabilities of events are modeled by a stochastic process.

In the first chapter, we consider the logistic regression model with an integrated regressor. In particular, we derive the limit distributions of the nonlinear least squares (NLS) estimators and their t-ratios. It is shown that the NLS estimators are generally not efficient. Moreover, the t-ratios for the level parameters have limit distributions that are non-normal and dependent upon nuisance parameters, due to the asymptotic correlation between the innovations of the regressor and the regression errors. We propose an efficient NLS procedure to deal with the inefficiency of the estimators and inferential difficulty. The new NLS procedure yields estimators that are efficient and have asymptotically normal t-ratios. The second chapter considers a state space model with integrated latent variables. The model provides an effective framework to specify, test and extract common stochastic trends in a set of integrated time series. The standard Kalman filter is used to estimate the model, and the asymptotic theory of the Kalman filter is derived. In particular, we establish the consistency and asymptotic mixed normality of the maximum likelihood estimator, and validate the conventional inference for this class of models. Moreover, we derive a trace statistic to test the number of common stochastic trends in a system of integrated time series. The asymptotic distribution of the trace statistic is derived as normal. Chapter 3 provides an empirical illustration by investigating common stochastic trends of interest rates with different maturities.