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The social and economic importance of little and medium enterprises has generated a great interest in analysing factors that could condition their survival and ameliorate their economic results. Among these factors we distinguish those measures that tend to diminish financial difficulties that these organisations usually suffer, specially the credit rationing. Thus, the main objective of this Ph.D. thesis is to determine if it is possible to find within the Andalusian credit market any restrictions, for instance to credit concessions and its commercial conditions to more little enterprises or to those that are not commonly related to the banks.Once the theoretical framework about credit rationing is revised an empirical research combining both qualitative and quantitative research was conducted. The qualitative research was based on in-depth interviews to credit concession managers, in order to determine, from created meaning units, their perceptions about evaluation and concession of credits to firms. The quantitative research was based on information obtained from questionnaires sent to different Andalusian enterprises and from the accounting information that by law must be at the disposal of the public scrutiny. The conjoint analysis allowed us to determine the type of credit rationing within the Andalusian credit market, as well as factors that influence and determine it. Finally, we conclude with a set of recommendations for the different enterprises, the financial entities as well as public institutions for the amelioration of the efficiency of the banking credit market and the reduction of negative consequences of the credit rationing., 400 p.

I investigate the relationship between corporate financial policy and the ownership stability of a firm's institutional shareholders. In each chapter of my dissertation I empirically investigate this relationship in a different setting: the first chapter with respect to earnings management, the second chapter with respect to corporate spin-offs, and the third chapter with respect to payout policy. Unique to my research I utilize the complete ownership history of each institutional stock position to create measures of ownership stability including fund investment horizon and ownership length. Overall, I find significant relationships between each one of the three financial policies and measures of ownership stability.

Hedge fund industry has grown to be a key player in the financial markets. Just as large investment banks, the failure of this industry will greatly destroy the liquidity and stability of the whole system. However, contrast to regulated mutual funds, hedge funds are private and lightly regulated entities who are not obliged to disclose their activities to the general public. Hedge funds risk taking activity using ways such as short selling and excessive leverage and their increasingly correlated strategies pose substantial threats to the financial stability of the great economy. In the First Chapter, we propose a simple framework which adopts the theory of acceptable risks and calculate capital requirements using the limited available data on hedge funds. We model the risky cash flow asset less liability (or Net Asset Value) directly using either a Gaussian process or a Variance Gamma process and apply the method to demeaned NAV data on $3622$ hedge funds from January 2005 to April 2009. Funds are analyzed for their required capital and the value of the option to put losses back to the taxpayers. The previous study has considered funds individually with no correlation between them. Focusing only on individual funds ignores the critical interactions between them and can cause the regulators to overlook important changes in the overall system. Because many hedge funds employ similar investment strategies they produce correlated returns. The failure of these correlated large funds will greatly affect the markets systematically either in a direct or an indirect way. In the Second Chapter, we propose a systemic approach with correlated largest market participants and we study the $30$ largest funds as of April 2009 with total Asset Under Management over $\$620$ Bn. We demonstrate the systemic capital charges to be held by the broad economy, as well as the capital charges at the fund level accounting for the residual idiosyncratic risk component. Hedge fund investment str

This dissertation examines the factors associated with sustainable privatization of infrastructure projects. Privatization offers a way for governments to make infrastructure delivery more effective and efficient than exclusively public provision, but often the promise is fraught with peril. The three essays that constitute this dissertation seek to use empirical data and analysis to answer three selected questions regarding sustainable privatization: ,,h What causes the private sector to exit from infrastructure projects? ,,h Do Public-Private Partnerships (PPPs) provide value for money to governments? ,,h Does privatization lead to benign outcomes? The first essay of this dissertation takes the broadest view, looking at cross-country, cross-sector regression analysis to unearth patterns in infrastructure privatization failures - with a view to understand as well the factors that lead to success. The second essay takes a further step from the broad overview of the first essay by looking in detail at individual projects and examining what factors could lead to better value for money to governments. Finally, the third essay looks at the choice between asset sales and share issue privatization as two specific methods for privatization and their subsequent impact on the performance of the privatized company. The three essays thus represent a progression from survival to good health and finally to growth. My major conclusions are: ,,h Project cancellation rates, though rising, are still low. Although ownership may change hands, for the most part, the private sector is staying in private infrastructure projects. ,,h Although trends in cancellation may not be an issue for private infrastructure projects as a whole, it is a concern in the water and sewerage sector. The high probability of cancellation and relatively low level of fresh investment in the sector suggests a declining role for the private sector in making available this essential service. ,,h There is value for

The first essay examines news and the cross section of returns. Using a sentiment score provided by Thomson Reuters to measure the tone of news articles, this paper examines monthly portfolio returns constructed from information about past news articles. The sentiment score is obtained from the kind of words and phrases that are used in the news article. Positive tone in news articles in the past months predicts positive returns. Similarly, negative tone in the past months predicts negative returns. Past sentiment predicts future returns even for large stocks. The predictive ability of past sentiment dominates the predictive ability of past returns. After controlling for past sentiment, the predictive ability of past returns (in predicting future return) disappears. The findings are robust to multiple specifications. The predictive ability of past sentiment can be used profitably. When applied to the largest decile of stocks, a strategy that takes a long position in stocks with past positive sentiment score and a short position in stocks with past negative sentiment score generates a statistically significant alpha of 34 basis points per month. The resulting portfolio is also positively correlated with a long-short momentum portfolio. Within the same time period, a trading strategy using the sentiment scores from the subset of news articles citing analysts is not profitable. The news items that cite analysts have economically significant contemporaneous returns. The findings suggest that (i) the market underreacts to information contained in news articles, (ii) momentum might be related to underreaction to the sentiment information, and (iii) market participants pay attention to sentiment score information in analyst news. The findings are consistent with a model where one trader has private information and others are trading based on past returns and volume information. The paper also shows that after adjusting for firm size, stocks with abnormally high counts of n

This dissertation concerns cross-country consumption risk sharing in a long-run perspective. Financial integration, empirically measured by cross-country holdings of assets and liabilities, has increased dramatically in the past two decades. But what can explain the lack of cross-country risk sharing documented in the literature? Chapters 2 and 3 of this dissertation address this question. In Chapter 2, we set up a model to illustrate the mechanical difference between a bond economy and an insurance economy. We show that a bond economy can intertemporally smooth consumption in face of transitory output shocks, but not for permanent output shocks; an insurance economy is essential for risk sharing on permanent shocks. We therefore show that when both transitory and permanent output shocks exist, transitory shocks only create "noise" if the focus of interest is on identifying risk sharing in the long run. In Chapter 3, we specify an empirical nonstationary panel regression model to test long-run consumption risk sharing across a sample of OECD and emerging market countries. This is in contrast to tests in the literature which are mainly about risks at business cycle frequency. We argue that these existing tests neglected the permanent elements of risks that are of interest and that their model specifications were not rich enough to accommodate heterogeneous short-run dynamics. Since our methodology focuses on identifying cointegrating relationships while allowing for arbitrary short-run dynamics, we can obtain a consistent estimate of long-run risk sharing while disregarding any short-run nuisance factors. Our results show that, for the period of 1950-2008, the level of long-run risk sharing in OECD countries is similar to that in emerging market countries. However, during the financial integration episode of the past two decades, long-run risk sharing in OECD countries increased more than in emerging market countries. Furthermore, we investigate the relationship betw

The dissertation investigates the role of networks and connectedness on CEO and director labor market outcomes. I develop new measures of degree, closeness, betweenness, and eigenvector centrality using a new database of executive connections based on executive and director biographical information supplied by BoardEx. I then study the influence of networks and connectedness on CEO labor market outcomes, including new CEO appointments, CEO termination, and CEO compensation. I distinguish between the pairwise specific CEO-board connectedness and the strength and structure of the CEO's overall connectedness. I find that both types of connectedness add to traditional turnover and compensation variables in distinct and economically significant ways. Specific connectedness increases CEO entrenchment. Greater overall CEO connectedness on the employment network results in greater likelihood of CEO departure, greater turnover-performance sensitivity, and more rapid re-employment of a departed CEO. The existence of specific links between the CEO candidate and the board of directors enhances the chances of appointment in the event a company chooses to appoint an outsider as the CEO. Finally, CEOs with better overall connectedness enjoy higher total compensation. The evidence suggests that the general connectedness of a CEO in the employment network has significant and distinct economic effects beyond those of the connections between the CEO and the board in the current firm. In the paper "On the Independence of Independent Directors", I examine director appointment and replacement decisions after a new CEO assumes office. A new incoming CEO can make many changes in the size and structure of the board and influence on the types of individuals that populate it. I assess the role played by prior connections between the CEO and outside directors, including the overlaps established through common employment history, educational background, and other activities. I also test the nat

The U.S. Federal Highway Trust Fund has experienced significant shortfalls in revenue. This thesis develops three green transportation financing polices based on the fixed vehicle mileage traveled (VMT) fee concept, and analyzes their impact on revenue generation, congestion management, energy/environmental sustainability, and equity. A regression demand model is developed for the analysis. The financing options are compared against a base-case policy of increasing the Federal gas tax by 10 cents/gallon. The distributional impacts of the proposed policies are similar to that of the existing gas tax; green VMT fees and emissions taxes are more regressive, and nation-wide congestion pricing is relatively more progressive. To consider household vehicle ownership number and type decisions, discrete choice models are used. By combining the two modeling techniques with EPA's Motor Vehicle Emission Simulator, we see as gas prices increase, total VMT and emission levels decrease and households move to more fuel efficient vehicles.

In the study of finance, likelihood based or moment based methods are frequently used to estimate parameters for various kinds of models given the sampled return data. While the former method is not robust, the latter one suffers from loss of efficiency and high noise-to-signal ratio in the data. In this paper, we investigate the ergodic behavior of the bivariate series described by the Barndorff-Nielsen and Shephard (BN-S) stochastic volatility model. In particular, we study its beta-mixing property and the differentiability of its stationary distribution. A robust and efficient estimation scheme for continuous models called the Negative Exponential Disparity Estimator (NEDE) is studied. We apply this method and the classical Method of Moments (MOM) to the BN-S model. Asymptotic properties of the NEDE and the MOM estimator are proved, implementation details are provided.

The roots of the 2008 financial crisis are often traced back to the collapse of the housing bubble. The factors that precipitated the crisis, and propagated its effects on firms and consumers to produce an economic contraction, are still the subject of ongoing debate among academics, policy makers, and practitioners. Macroeconomic factors, flawed government policies, and perverse incentives at financial institutions that lead to excessive risk taking are often cited as contributing forces to the crisis. In this dissertation, I investigate two forces that drove the 2008 financial crisis. One force is the credit rating agencies, whose excessively generous ratings lie at the root of the 2008 financial crisis. The popular claim is that the rating agencies have become too loose at their rating assignments, which led to overestimation of the creditworthiness of the companies by the public. In this dissertation, I examine the assertion that the rating companies have progressively relaxed their standards in recent decades for corporate credit ratings. Such relaxation seems to have lulled investors into a false sense of security about the safety of credit instruments whose values collapsed abruptly. Next I examine the contagion effects of rating downgrades. I ask whether rating downgrade news have spill over effects on the rest of the industry. I then investigate a different force that has received less attention in the crisis; investor confidence. The third essay focuses explicitly on the period when the financial crisis was at its peak. In Essay 1 titled, "Structural Shifts in Credit Rating Standards", I examine the time series variation in corporate credit rating standards for the period 1985-2007. I report two main findings: (i) There is a divergent pattern between investment grade and speculative grade rating standards during 1985-2002. Investment grade ratings tighten between 1985 and 2002. In contrast, the speculative grade rating standards loosen during the same peri

My dissertation consists of three essays on international capital flows. In the first essay, titled "Do small firms benefit more from foreign portfolio investment? Evidence from a Natural Experiment," I test whether an increase in the supply of foreign portfolio capital benefits small firms by using the Thai government's unique restriction on capital inflows as a natural experiment. The Thai government imposed a very stringent capital control on December 19, 2006, and then quickly abandoned it one day later. Although many other studies have been plagued with the difficulty of separating the impact of foreign capital from the impact of other concurrent events, this experiment helps me solve the time-series identification problem. My results suggest that foreign portfolio investment helps large firms the most, contrary to existing evidence, which finds a benefit in foreign portfolio investment for small firms. I also investigate the importance of other firm characteristics correlated with size, which includes a firm's exchange rate exposure, foreign ownership, and political connection. The next two essays are on the dynamic patterns of international mergers and acquisitions. In the second essay, I uncover key facts about international M&As by estimating a variety of reduced form models. I find that: (1) Cross-border mergers come in waves that are highly correlated with business cycles. (2) Most mergers occur when both the acquirer and the target economies are booming. (3) Merger booms have both an industry-level component (productivity shocks) and a country-level component (financial shocks). (4) Across over one million observations, acquirers tend to be more productive and targets tend to be less productive, compared to their industry peers. These facts are consistent with the neoclassical theory of mergers in which productive firms expand overseas to seize new investment opportunities, but not with the widely held views that most cross-border mergers occur when the

The first essay provides theory concerning the risk-taking incentives of microfinance borrowers in varying cases: individual liability, group liability without social sanctions, and group liability with social sanctions. The results provide insight into how a community's social capital and a country's credit rights interact to induce recipients of microfinance programs to take risk. Consistent with recent anecdotal evidence that suggests a "dark side" to microfinance, the results show that communal ties among joint liability borrowing groups may not lead to higher repayment rates and may have worse welfare effects on the recipients by making the poorest group members unwilling to take the risks necessary to grow a business. The second essay considers floating rate convertibles (FRCs). FRCs are a category of PIPE securities that receive negative associations in both the academic and professional literature. This study sheds light on the managerial relationship to the decision to issue FRCs and to the variation in market response to these issues. One main result of the study identifies influence of the CFO relative to the CEO as significant in the decision to issue FRCs and in the market's immediate reaction to the issuance. Another main result is that FRC issuing firms with CFOs without prior public equity issuance experience have significantly negative long run abnormal returns, whereas FRC issuing firms with experienced CFOs do not.

My dissertation examines a board's decision to hire a star CEO and the implication of such decision on the new CEO compensation and firm performance. I develop a new methodology to identify a star CEO by analyzing the texts contained in 18,240 Wall Street Journal news articles. Unlike previous measures, my new measure accounts for the time series variations of executives' visibility as well as how favorably these executives are portrayed in the business press. In order to study the role of board composition on CEO selection, executive compensation and firm performance, I introduce board industry tenure, a new measure of board composition, to capture the average years of industry-related experience acquired by independent directors. In my first essay, I investigate a board's decision to hire a star CEO and analyze the consequences of this decision for firm performance. I show that boards with short industry tenure or busy boards are more likely to select a star CEO. Firms that hire star CEOs subsequently perform worse than firms that hire non-star CEOs. However, after I use the propensity score matching method to control for pre-hiring board composition and other determinants of star CEO selection, firms that hire star CEOs perform equally well as firms that hire non-star CEOs. My second essay compares the compensation design of a star versus a non-star CEO. I find that a star CEO is awarded 1.87 million dollars more in annual total compensation, and 2.19 million dollars more in annual option compensation, after I control for firm size, board characteristics, B/M ratio, leverage, EBIT/Assets, stock return, firm risk, industry and year effects, and other related variables. In addition, star CEOs receive higher compensation in firms where directors have short industry tenure, where directors hold multiple board seats simultaneously, where board size is large, and where board is composed of less independent directors. The above results hold true after I use a control-gr

Due to special characteristics of Public Private Partnerships (PPPs), the ―transaction cost‖ in PPPs is more than other delivery methods. Although there have been some attempts to study transaction costs in PPPs in Europe, transaction costs of PPPs in the US has not been explored well, and the need to develop a standard cost breakdown structure to track, measure and estimate transaction costs in PPP projects is paramount. This thesis covers a theoretical discussion about the definition of transaction costs and different factors affecting them, and based on the mapping of PPP transaction activities to project costs, presents a cost breakdown structure (CBS) as well as a cost accounting matrix. This accounting model is justified in chapter four using two case studies: I-495 HOT lanes project in Virginia, and I-595 improvements in Florida. Finally, in chapter 5 a template for an estimating model which can be used in procurement transaction cost estimates is developed based on the data collected from some infrastructure PPP projects in Europe, and applying Bayesian theory.

This paper investigates a dataset that provides information about assets held by U.S. equity mutual funds, but are not U.S. equities (`unmapped holdings'). I show the widespread presence of these assets and investigate how they are used within mutual fund portfolios. I find that their effects are statistically significant upon both portfolio risk and return. They can either hedge or complement mapped asset returns. I show that predictability of mutual fund returns are reduced when unmapped holdings returns are controlled. Since unmapped holdings returns are not observable, I define an econometric technique that in chapter two that can control for their effect. This technique uses an average return (an `endogenous benchmark') to control for common but immeasurable or unobservable characteristics in a group of funds. I find that an `endogenous benchmark' alone produces estimates nearly as good as those using common risk factor regression models. By combining an endoge- nous bechmark with other risk factors in regression models, I find that estimates are improved.

To what extent do civil liberties affect economic development? This dissertation addresses this question in two essays. The first chapter (joint with Roger Betancourt) provides a new economic interpretation of civil liberties as rights over a person's most basic human asset: her own self. The importance of these rights to economic development is based on the principle that property rights-defined over a broad set of "property''-are crucial for economic growth. The empirical literature to date shows little support for such claims related to civil liberties, however, with ambiguous evidence on the role of these rights in driving long-run growth. Using newly available data from Freedom House, we find that one of the recently disaggregated categories of civil liberties explains income differences across countries more powerfully and robustly than any other measure of property rights or the rule of law considered. This component, entitled "Personal Autonomy and Individual Rights,'' evaluates the extent of personal choice over issues such as where to work, study, and live, as well as a broader set of property rights and other choices. While the first chapter finds that greater civil liberties can substantially improve long-run economic development, the second chapter identifies a key friction in this relationship. In countries that lack complementary institutions, civil liberties governing individual mobility can complicate credit transactions. By allowing individuals to move to locations where less is known about their prior defaults, mobility freedoms induce opaqueness and can result in credit rationing. I develop an instrumental variable estimation to study these effects, which would otherwise be complicated by omitted variable bias and endogeneity. Using household survey data from Guatemala, I instrument for individual migration with the interaction of violence patterns and individual sensitivities toward that violence. Using this approach, I find that the act of migr

New residential construction is significantly more procyclical in emerging markets than in developed countries, although the correlation between aggregate investment and output is similar across emerging and developed countries. This paper shows that a multi-sector stochastic growth model with a housing production sector can explain this fact. The key feature of the model is that housing demand depends on the cyclical behavior of consumption of tradable goods, which is much more volatile in emerging markets. Therefore, when a positive productivity shock hits the economy, the larger response of consumption of tradable goods implies that it is more attractive for consumers in emerging markets to purchase housing than it is for consumers in developed countries. This paper considers various factors that contribute to the large variability of consumption in emerging markets, and finds that larger trend growth rate shocks in emerging markets than in developed countries are quantitatively important. The reason is that a positive productivity shock signals even higher productivity in the future with large growth rate shocks, so the current consumption response is large and the return to housing investment is high. While qualitatively the model matches the differences in the cyclicality of new residential construction across emerging markets and developed countries, quantitatively the model underestimates this comovement and the volatilities in housing investment in emerging markets. Furthermore, international interest rate shocks highly correlated with productivity shocks are very important in explaining the large swings in housing investment in emerging markets. Interest rate shocks work through three channels to affect housing investment: the direct `mortgage rate' effect, the indirect effect through increasing non-housing consumption and the supply effect due to the working capital constraint. Quantitatively, the direct `mortgage rate' effect is the most important channe

Economic Value Added (EVA), when applied properly in a company, impacts all departments and decisions. The equation for EVA as well as the adjustments that must be made to current accounting practices is the basis for an understanding of EVA. The success of EVA is displayed as companies that have implemented EVA to varying degrees are compared with companies that have not implemented EVA. Once the argument for the overall superiority of EVA is made, traditional performance measures and current accounting practices are evaluated. Then, the importance of creating value within corporations becomes apparent. Finally, a detailed example of the implementation process that took place several years ago at Harsco argued in favor of all companies adopting EVA.

As graduation day approaches, many college students look forward to a time of independence when they can pursue their lifelong dreams and passions. Due to a lack of knowledge about personal finance, young adults are inadequately prepared to manage their money after they graduate from college. These individuals usually make many detrimental mistakes until they finally learn how to make good financial decisions; however, most never master this art. If college graduates have the correct knowledge and motivation for getting control of their finances, they can achieve financial security by making wise decisions from the start. College students need to understand various components of personal finance, including building good credit, avoiding debt, investing, real estate, and planning for retirement. All of these subjects will be covered from the perspective of a recent college graduate who, ready or not, has to make these financial decisions. This guide will provide insightful information that individuals need to know in order to be financially successful.

In this paper, we introduce DSPMD, discretely sampled process with pre-specified marginals and pre-specified dependence, and SRLMD, series representation for Levy process with pre-specified marginals and pre-specified dependence. In the DSPMD for Levy processes, some regular copula can be extracted from the discrete samples of a joint process so as to correlate discrete samples on the pre-specified marginal processes. We prove that if the pre-specified marginals and pre-specified joint processes are some Levy processes, the DSPMD converges to some Levy process. Compared with Levy copula, proposed by Tankov, DSPMD offers easy access to statistical properties of the dependence structure through the copula on the random variable level, which is difficult in Levy copula. It also comes with a simulation algorithm that overcomes the first component bias effect of the series representation algorithm proposed by Tankov. As an application and example of DSPMD for Levy process, we examined the statistical explanatory power of VG copula implied by the multidimensional VG processes. Several baskets of equities and indices are considered. Some basket options are priced using risk neutral marginals and statistical dependence. SRLMD is based on Rosinski's series representation and Sklar's Theorem for Levy copula. Starting with a series representation of a multi-dimensional Levy process, we transform each term in the series component-wise to new jumps satisfying pre-specified jump measure. The resulting series is the SRLMD, which is an exact Levy process, not an approximation. We give an example of alpha-stable Levy copula which has the advantage over what Tankov proposed in the follow aspects: First, it is naturally high dimensional. Second, the structure is so general that it allows from complete dependence to complete independence and can have any regular copula behavior built in. Thirdly, and most importantly, in simulation, the truncation error can be well controlled and simul

The allowance price in Phase I of the European Union Emissions Trading Scheme (EU ETS) followed a peculiar path, increasing from €7 in 2005 to over €30 in 2006, before crashing, recovering and ultimately finishing at zero by the end of 2007. I examine if the price can be explained by marginal abatement costs as predicted by economic theory, or if there were other price determinants. This has important policy implications, since the least-cost solution depends on the equality of permit price and marginal abatement costs and is the main argument in favor of permit markets. I start with a model that incorporates the most commonly cited market fundamentals and find that the latter only explain a small part of the allowance price variation, raising the question of a bubble. I carry out two different bubbles tests, the results of both of which are consistent with the presence of an allowance price bubble. I then address whether market manipulation by dominant power generators could have lead to the initial allowance price increase. I extend economic theory to include the interaction between output and permit markets. I derive a threshold of free allocation beyond which firms find it profitable to manipulate the permit price upwards, even if they are net allowance buyers. Market data indicates that this threshold was exceeded for EU power generators. Finally, I investigate the possibility that due to the speed at which the market was set up, firms may have been unable to engage in effective abatement before the end of Phase I. I develop a model under the assumption of no abatement, where firms aim to reach compliance exclusively by purchasing allowances on the market. Thus, the allowance payoff becomes that of a binary option, for which I derive a pricing formula. The model fits daily data from the years 2006-7 well. I conclude that the allowance price in Phase I was not driven by marginal abatement costs, but by a combination of price manipulation, self-fulfilli

The VIX index measures the one-month risk-neutral forward volatility of the S&P500 (SPX) index. While Lévy processes such as the CGMY process can price options on the underlying stock or index, they implicitly assume a constant forward volatility. This makes them unsuitable for pricing options on VIX. We propose a model within the one dimensional Markovian framework for pricing VIX and SPX options simultaneously. We introduce space dependence of volatility by scaling the CGMY process with a leverage function. The resultant process can consistently price options on SPX and VIX of a given maturity. We also perform surface calibrations of options on the two indices separately. We explore the properties of the implied distribution of the SPX from both indices and conclude that the VIX index under-weighs small jumps as compared to large jumps as well as the skewness of the SPX index .

In this thesis, the research focuses on the development and implementation of two hybrid models for pricing variance swaps and variance options. Some variance derivatives (i.e., variance swap) are priced using portfolios of put and call options. However, longer-term options price not only stock variance, but also interest rate variance. By ignoring stochastic interest rates, variance derivatives utilizing this approach are overpriced. In recent months, the Federal Reserve lowered the funds rate as the equity markets fell. This created correlation between equities and interest rates. Furthermore, interest rate volatility increased. Thus, it is presently crucial to understand how stochastic interest rates and correlation impact the pricing of variance derivatives. The first model (SR-LV) is driven by two processes: the stock return follows a diffusion and the stochastic interest rate is driven by the Hull-White short rate dynamics. Local volatility is constructed with the help of Gyongy's result on recovering a Markov process from a general n-dimensional Ito process with the same marginals. In the solution for the local volatility, the joint forward density of the stock price and interest rate is derived by solving an appropriate partial differential equation. Realized variance can then be computed by Monte Carlo simulation under the forward measure where local variances are collected over each realized path and averaged. Results are presented for different levels of assumed correlation between the stock price and interest rates. Prices obtained are lower than those produced with an options portfolio and this price difference strongly depends on the volatility of the short rate. The second model (SR-SLV) adds one more dimension to the first model. In practice, volatility of a stock may change without the stock price moving. This effect is not captured in SR-LV model, but stochastic local volatility exhibits this trait. In this setting, a leverage function must be cali

Access to private capital markets is the most salient difference between emerging market economies and other developing countries. However, in contrast to developed economies, emerging markets have had a troubled relationship with capital fows. In particular, balance of payments and debt crises have been a recurrent problem. The three chapters of this dissertation contribute to the literature on emerging markets and their relationship with capital markets. Chapter 1 analyzes the effects of volatility on sovereign default risk. Empirically, the paper establishes a concave relationship between spreads and volatility. While for low levels of volatility an increase in volatility is associated with an increase in the sovereign risk premium, the risk premium increases at a decreasing rate. This empirical relationship is robust to different estimation methods, sam- ples and control variables. Furthermore, the relationship between volatility and risk premia is non-monotonic: while at low levels of volatility an increase in volatility implies an increase also in spreads, for sufficiently high levels of volatility this relationship turns negative. The chapter also presents a quantitative model of sovereign debt with default risk consistent with this feature and other characteristics of EME debt. The intuition for this result is the existence of a trade-off between prudential behavior in order to avoid large consumption fluctuations under autarky and the increased likelihood of a default, given default provides some short-run relief under a very bad realization of shocks. Chapter 2 addresses the determinants of the composition of cross-border investment positions. Using a novel database of bilateral capital stocks for all types of investment - FDI, portfolio equity securities, debt securities as well as loans - for a broad set of 77 countries, we show the importance of two key determinants of the composition of cross-border asset positions: information frictions and the qualit

There is ample historical data to suggest that log returns of stocks and indices are not independent and identically distributed Normally, as is commonly assumed. Instead, the returns of financial assets are skewed and have higher kurtosis. To account for skewness and excess kurtosis, it is necessary to have a distribution that is more flexible than the Gaussian distribution and uses additional information that may be present in higher moments. The federal government's Thrift Savings Plan (TSP) is the largest defined contribution retirement savings and investment plan, with nearly 3.6 million participants and over $173 billion in assets. The TSP offers five assets (government bond fund, fixed income fund, large-cap stock fund, small-cap stock fund, and international stock fund) to U.S. government civilian employees and uniformed service members. The limited choice of investments, in comparison to most 401(k) plans, may be disappointing from a participant's perspective; however, it provides an attractive framework for empirical study. In this study, we investigate how the optimal choice of TSP assets changes when traditional portfolio optimization methods are replaced with newer techniques. Specifically, the following research questions are posed and answered: (1) Does use of a non-Gaussian factor model for returns, generated with independent components analysis (ICA) and following the Variance Gamma (VG) process, provide any advantage in constructing optimal TSP portfolios? (2) Can excess TSP portfolio returns be generated through rebalancing to an optimal mix? If so, what frequency of rebalancing provides benefits that offset increased computationalal and administrative burden? (3) How does the use of coherent risk and portfolio performance measures, in place of variance as the traditional the measure for risk and Sharpe Ratio as the usual portfolio performance measure affect TSP portfolio selection? We show through simulation that some of the newer schemes should

Using U.S. cross-border bank exposure data, this study establishes a line of arguments and findings, which together constitute the following observation: "Deregulation of U.S. banks, via consolidation and a volatile earnings stream, increased volatility in bank lending to emerging economies, and, in due course, worsened the financial crises in emerging economies." The volatility of U.S. bank lending to emerging economies has increased during the past twenty years. To explain the across-the-board, increasing volatility of U.S. bank emerging market claims, this study turns to the supply side of the equation: the deregulation in the U.S. banking sector that imparted this commonality to their banks' investment patterns to emerging economies. In so doing, it unveils the linkages through which U.S. banking deregulation ratcheted up the volatility of U.S. bank lending into emerging economies. It starts with the detection of a particular feature of U.S. bank emerging market lending that warrants further attention -- increasing volatility over time. Unlike bank lending from Europe or Japan, U.S. bank lending exhibited the unique feature of increasing volatility over time, regardless of its destination. By looking into domestic push factors that could have contributed to this characteristic, this study identified a temporal association between important deregulation initiatives in the U.S. banking industry and the volatility of emerging market lending by U.S. banks during the same period. This association was then explained by the linkages between the major outcomes of deregulation -- consolidation of the banking industry and diversification of banking activities -- and the increased volatility of lending into emerging economies. Together, it argues that the U.S. banking deregulation had the unintended and unanticipated side effect of increasing the volatility of U.S. bank lending into emerging economies.

The purpose of this thesis is to review several related regime-switching time series models. Specifically, we use simulated data to compare models where the unobserved state vector follows a Markov process against an independent logistic mixture process. We apply these techniques to crude oil and heating oil futures prices using several explanatory variables to estimate the unobserved regimes. We find that crude oil is characterized by regime switching, where prices alternate between a high volatility state with low returns and significant mean reversion and a low volatility state with positive returns and some trending. The spread between one-month and three-month futures prices is an important determinant in the dynamics of crude oil prices.