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My dissertation consists of three chapters. In the first chapter, I analyze theeffect of the merger between American Airlines (AA) & US Airways (US) on market price and product quality. I use two complementary methodologies: difference-in-differences (DID) and merger simulation. Contrary to other results in the airline literature, the DID analysis shows that, overall, price has decreased as a result of themerger. While divestitures required as part of the merger had a strong price-reducing effect, the overall decrease involves non-divestiture markets as well. Interestingly, the decrease appears only in large airport-pair markets, whereas prices rose considerably in smaller ones. Effects on quality are mixed. The DID analysis shows that the merger reduced flight cancellations, increased flight delays, and had no effect on flight frequency or capacity overall. Using merger simulation, I find that the change in ownership leads to a 3% increase in price. The structural model performs betterin predicting the post-merger price if I allow the model to deviate from the Bertrand-Nash conduct. A 10% cost reduction due to the merger is able to predict the post-merger price quite well. When I incorporate a conduct parameter into the model, the required percentage of cost savings is lower. Given the divestiture and the subsequententry of low-cost carriers (LCCs), tacit collusion may break down. Thus both cost savings and reduced cooperation could explain a reduction in the price in the post-merger period.In my second chapter, I analyze possible reasons why airline prices are higher inthe smaller markets compared to larger markets. In the literature, most of the studies ignore the fact that the smaller markets are different compared to larger markets in terms of the nature of competition. I find that a combination of lower competition, and lack of entry from low cost carriers (LCCs) are the reasons behind higher prices in the smaller city-pair markets. I show that price is substantially higher in a market with a fewer number of firms controlling for several other factors. My paper estimates the modified critical number of firms to be 5 and the critical value of the HHI to be .6.In my third chapter, I study the effect of announcement of investment in research & development (R&D) on the value of a firm in the pharmaceutical industry. Three types of R&D by the pharmaceutical firms are considered for the analysis: acquisition of other smaller firms, internal investment in R&D, and collaborative investment in R&D. This chapter finds that few target specific characteristics and financial charac-teristics of the acquiring firm are important drivers of the abnormal returns around the announcement period.

Empirical studies of banking sector risk typically look at either the relationship of competition to risk or bank capital adequacy to risk but rarely integrate the two. This raises an issue of potential bias arising from omission of relevant control variables, and is of particular importance in the light of the introduction of a regulatory leverage ratio in Basel III. To fill this lacuna, we provide estimates for the relation between capital adequacy, bank competition and other control variables and four measures of aggregate bank risk for different country groups and time periods. We use macro data from the World Bank’s Global Financial Development Database over 1999-2015 for up to 120 countries globally. Results largely support “competition-fragility”, i.e. a positive relation of competition to risk controlling for capital; both capital measures controlling for competition are significant predictors of risk, but signs vary across risk measures; the leverage ratio is much more widely relevant than the risk adjusted capital ratio; and there are marked differences in results between advanced countries and emerging markets. Finally, we find competition drives capital ratios lower in a Panel VAR. We contend that our results using macro data are of particular relevance to regulators undertaking macroprudential surveillance because such data gives a greater weight to large systemic institutions than the more commonly-used bank-by-bank data.

This thesis explores the optimal trading strategies in different types of financial markets and its impact in shaping the investment decisions and patterns across the individuals and countries. The findings show that there are long term portfolio diversification possibilities among stock market, the short term possibilities, however, are extremely limited. In regards to the foreign exchange markets, 60% of the long run variations in the real price of gold attributes to the carry trade strategies. Moreover, the findings illustrate that neighbouring countries tend to hold the financial asset from the same destination country, and such spillover effect is stronger when both countries adopt pegged exchange rate regime. These have given researchers a better understanding of the market mechanism.