Business

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  • (2010) Mun, Xiuyan
    Thesis
    This dissertation is primarily concerned with mixture models for high-dimensional financial data. New flexible mixture models are introduced and implemented with fast and effective optimization routines. The stochastic gradient approach uses random gradients to update the parameters of the mixture model improving the chance of the iterates converging to a higher mode. Chapter 2 provides the details of the stochastic gradient optimization routines used. Chapter 3 suggests two new multivariate density estimators, namely the marginal adaptation mixture of normals and the mixture of normals copula. Their performances are compared with a few recent popular models such as the skewed-t model. Chapter 4 discusses covariance estimation for high dimensional data. The aim of the chapter is to improve the estimation of covariance matrices by using mixture shrinkage priors. This chapter also shows how to apply the priors to the simultaneous estimation of several covariance matrices such as in the case of mixture of normals models. Chapters 5 and 6 consider the estimation or fitting of models to time series data, when the models may experience a small number of structural breaks. Chapter 5 looks at univariate data and Chapter 6 considers multivariate data. In particular, Chapter 6 shows how to estimate a Gaussian vector autoregressive model subject to occasional structural breaks using a mixture of experts framework.

  • (2011) Loh, Tze Hua
    Thesis
    This thesis examines the trading behaviour of investors in the equities market of the Singapore Exchange (SGX). One of the main aims is to better understand how the heterogeneity of market participants with their strategies may be linked to the properties of order book dynamics. The conclusions drawn from the three essays could potentially influence the decisions of regulators, exchange operators, and investors in securities markets. The first essay investigates client order execution strategies in terms of how they place orders across the limit order book. The results suggest that a multi-price trading strategy, where investors place a “network” of buy and sell limit orders simultaneously, is a viable strategy and might even be profitable enough for investors to persist with the strategy. It is also shown that institutional investors tend to place more aggressive orders than retail investors. The second essay examines the effects prior order transactions, limit order book attributes, and market variables have on order submission and cancellation choices. It is found that while order transactions have a positive same order type order-by-order serial correlation, when order flow is aggregated by time intervals, the correlation of the changes in aggregated order flow of the same order type between consecutive time intervals is negative even over short time periods of five seconds. The positive order-by-order serial correlation for orders of the same type is present regardless of whether the incoming transaction is by an institutional investor or a retail investor. The final essay studies how changes in the limit order book and market conditions affect the aggressiveness levels of orders after their submissions and thus influence order cancellations. Traders who place orders near the top of the order book actively monitor those orders and decisions to cancel orders are significantly affected by changes in order book conditions such as order depth, stock volatility, market volatility, price returns, and net trade imbalance. In managing and balancing non-execution risk and option-to-trade risk, the probability that traders cancel their orders also differs depending on whether their orders have moved further away, remain unchanged, or are nearer to the best same-side prices.

  • (2012) Kwan, Amy
    Thesis
    Recently, there has been widespread concern over the growth of new ‘dark’ trading venues in equity markets. It is important to understand the implications of these changes for market quality and the impact of different trading rules, in respect of dark pools, on the relative competitive positions of trading venues. Compared to exchange trading, dark venues are characterised by pre-trade opacity, exemptions from fair access requirements and the frequent use of sub-penny pricing. This dissertation shows that these unique features influence the ability of new and existing trading venues to compete for order flow and may have long term consequences for market quality. First, I investigate the role of sub-penny pricing in the competition for order flow between venues that differ on the basis of tick size regimes. I find that order flow migrates to dark venues offering sub-penny pricing when prices are constrained by the minimum 0.01 USD tick size on the exchange. The implication of the finding is that larger minimum tick sizes generally put trading venues at a competitive disadvantage notwithstanding the benefits of discouraging free-riding. Second, I show that dark venues may use their unique features to attract uninformed clients, resulting in a segregation of informed and uninformed order flow. As a result, dark market fragmentation is associated with lower market quality, evidenced by higher transaction costs and lower price efficiency. However, the execution of large transactions on dark venues does not harm market quality. Third, I test whether non-displayed limit order books are more attractive to informed traders than crossing networks that cross only at the midpoint because traders can use discretionary pricing to reduce non-execution risk. The results show that trades executed at non-discretionary prices are more informed than trades executed at the midpoint of the National Best Bid and Offer. This dissertation contributes to the long-standing debate on market fragmentation versus market consolidation. The results also have policy implications for market regulators, who are required by their published mandates to assure themselves before approving market design changes that the changes enhance market quality, taking account of both market efficiency and market integrity.

  • (2012) Chan, Ka Nok
    Thesis
    Stock exchanges have become more popular and serve as one of the most important investment channels for investors in different capitalist classes. As a result, the core objectives of the major capital market regulators is to maintain and promote market efficiency and integrity, and is becoming more critical than ever. Recently, the Hong Kong Stock Exchange (HKSE) experienced several major regulatory/market design changes, such as the introduction of the Securities and Futures Ordinance (SFO) and the closing call auctions (CCA), both of which are aimed at improving market quality. HKSE therefore provides an ideal environment to determine whether the impacts of these recent microstructure/regulatory changes have a beneficial or a harmful effect on market quality. This dissertation consists of three main essays. In the first essay, I estimate the incidence of suspicious illegal insider trading on the HKSE, and investigate whether the introduction of the SFO leads to a reduction in illegal insider trading cases. I find that the introduction of the SFO and the commencement of the first prosecution under the SFO have greatly improved market integrity. Results show that market integrity is lowest for stocks in the medium deciles, and suspected illegal insider trading cases are dominated by insiders buying prior to a price sensitive announcement. The second essay investigates the impact of the SFO on information asymmetry, transaction costs and volatility. Results indicate that the probability of informed trading (PIN) decreases significantly following the introduction of the SFO. Both quoted and effective spreads narrow following the implementation of the SFO. Results indicate volatility rises after the implementation of the SFO. The third essay examines the impact of the introduction and suspension of the closing call (CCA) auction mechanism on liquidity and the price discovery process. Results show that the introduction of the closing call auction does not generate new volume, but merely shifts volume from normal trading to the closing auction. Order depth in the continuous trading session decreases significantly, which leads to an increase in transaction costs. Following the suspension of the CCA, investors in the top four quintiles execute more of their trades during the last half hour of normal trading hours. The price discovery process is improved after the introduction of the auction. However, the suspension of it leads to a substantial deterioration.

  • (2012) Huang, Xuxing
    Thesis
    This study evaluates the short-term valuation impact of U.S. class action lawsuits by focusing on both sued and non-sued foreign companies listed in the United States. Using a comprehensive database that includes stock- and company-level information in both the U.S. and local home markets, I examine how private U.S. securities litigations affect the market value of both sued foreign companies and peer foreign firms not accused of wrongdoing. I find that during the event period surrounding the lawsuit-filing date, there is a significant negative stock price reaction for the sued foreign companies. Moreover, investors also tend to react negatively towards non-sued foreign issuers during this period. The logistic regression results also suggest that the determinants of lawsuit propensity are similar for foreign firms cross-listed in the U.S. and U.S. domestic companies. Finally, certain firm-, lawsuit-, and country-level characteristics can explain the degree of stock market reactions. The overall results provide evidence that private class action lawsuits in the U.S. have economically significant impact on cross-listed foreign issuers, thus playing an important role in overseeing and disciplining foreign companies.

  • (2013) Sahgal, Sidharth
    Thesis
    This dissertation is composed of three stand-alone research projects in corporate governance, banking and empirical asset pricing. In the first project, I use a sample of S&P 1500 firms to examine the role of outside directors with extended tenures in board-level governance, monitoring decisions, and advising outcomes. I find that firms with a higher proportion of directors with extended tenures have lower CEO pay, higher CEO turnover sensitivity following poor performance, and a smaller likelihood of intentionally misreporting earnings. These firms are less likely to make acquisitions, while the acquisitions that are made are of higher quality. My results show that regulatory efforts to impose term limits may, therefore, be misguided. In the second project, I use a sample of large banks across 38 countries to examine how the concentration of the banking system impacts the choice of business activities and consequently the stability of banks. I show that banks in less concentrated banking systems have higher levels of non-traditional business activities with higher shareholder returns, but at a cost of increased systemic risk. In contrast, the non-traditional business activities in highly concentrated banking systems help reduce the volatility of profits and also the systemic risk of banks. Unlike previous research, I show that there is not always a one-to-one relationship between non-traditional business activities and systemic risk. In the third project, I propose a novel measure of institutional attention based on readership statistics of news articles on Bloomberg terminals. I find that investors pay more attention to news stories for larger and low book-to-market firms. Contrary to previous studies, I do not find that institutional attention is reduced on Fridays. There is a sharp increase in abnormal turnover and absolute adjusted returns on days when institutional investors pay attention to news. The effects of institutional investor attention are much larger for smaller firms. Finally, while short term reversals are reduced on days after news is published, I provide some evidence that short term reversals do not occur on days after published news is read.

  • (2013) Nguyen, Thi Thuy
    Thesis
    The first study examines ownership concentration in the US and in 40 other countries. The recent study by Holderness (2009) challenges the widely belief and earlier findings (e.g. La Porta et al. (1998, 1999) and shows that the ownership of US firms is at least as concentrated as that of elsewhere. These findings raise fundamental questions regarding US ownership structure and the relation between ownership concentration and investor protection. Using a comprehensive international sample across 41 countries, this study re-examines the ownership concentration between US firms and non US firms. This study also extends the method of Holderness (2009) by examining at different cutoffs and controlling for country heterogeneity, and thus we find that US firms are more diffuse than non US firms. This paper also confirms that investor protection reduces ownership concentration cross countries. The second study examines the relationship between blockholdings and firm value and how this relationship changes across investor protection regimes for 20883 observations in 37 countries from 2006 to 2009. This study finds a U shaped relationship between firm value and the control rights of blockholdings. The U shaped relationship provides evidence that supports the entrenchment effect when the control rights of blockholdings are not sufficiently high. In addition, this study finds that the relation between blockholdings, firm value, and investor protection is not monotonic. The final study investigates the earnings management of firms that have different types of ultimate owners and how the earnings management of these firm groups responds to investor protection in 36 countries. Similar to other studies, I find that the earnings management of firms having ultimate owner is higher than that in widely held firms. However, I find this relationship does not hold for all firm groups having different types of ultimate owners. Furthermore, whereas other studies find that insiders are associated with greater earnings management in low investor protection countries than those in high investor protection countries, this study finds the opposite pattern for some firm groups. These findings contribute to the literature by examining the heterogeneity of blockholders, accounting reports, and investor protection.

  • (2012) Humphery-Jenner, Mark
    Thesis
    This thesis examines the drivers of value-creation and value-destruction in venture capital (VC) and private equity (PE) funds. VC/PE funds have become an increasingly important financial intermediary. They are a key source of capital for young companies who might otherwise have difficulty raising funds from stock-markets or from lenders. VC/PE funds can also help larger companies to restructure and re-direct operations. However, not all VC/PE funds earn super-normal returns or succeed in fostering innovation and value-creation. Subsequently, this thesis examines the drivers of value-creation in VC/PE funds. This thesis highlights the skewness that is present in VC/PE funds returns. The thesis then examines the role of fund-level characteristics in determining VC/PE performance. The thesis focuses on the role of a fund s size and diversification. The thesis also examines typical incentive contracts between VC/PE funds and their investors, and shows that the traditional incentive schemes can lead to sub-optimal performance. The thesis then uses this background to examine the structure of Australia s Innovation Investment Fund scheme, which is designed to support VC funds in their investments in start-up companies. The main contributions of this thesis are to highlight the drivers of VC/PE fund performance and to propose ways to incentivize and select value-creating funds.

  • (2013) Thul, Matthias
    Thesis
    This dissertation is composed of three stand-alone research projects on the valuation of contingent claims. The first essay proposes an extension of the Kou (2002) double exponential jump-diffusion model. Displacing the two exponential tails introduces additional degrees of asymmetry in the jump size distribution. The model dynamics are supported by a general equilibrium framework. Our main contribution is to derive closed-form solutions for European plain vanilla options. A further extension to displaced gamma tails is possible while retaining full analytical tractability. We propose an efficient routine to estimate the physical model parameters through maximum likelihood. Our empirical analysis covers a diverse sample of assets across equities, commodities and foreign exchange. We find that for the vast majority of assets, the original Kou (2002) model can be rejected in favour of our newly introduced displaced double exponential dynamics. The second essay proposes an approach to valuation and risk management of deferred start barrier options within the Black and Scholes (1973) framework. We provide closed-form solutions which are functions of the implied volatility smile. Our barrier options are contingent claims on two perfectly correlated assets that diffuse with different volatilities. While the terminal payoff is a function of one of the assets, the barrier trigger is determined by the path of the other. To mitigate the dynamic hedging problems associated with large discontinuous sensitivities, we suggest the application of an additional exponential bending of the barrier close to maturity. By generalizing the method of images, we obtain closed-form solutions for both deferred start piecewise exponential barrier options and associated rebates. The third essay models logarithmic asset prices under the physical probability measure as additive jump-diffusion processes. The corresponding risk-neutral probability measure is defined through an Esscher transform. We are interested in the conditions under which the jump size distributions under the two probability measures fall into the same parametric class. We show that it is both necessary and sufficient for the jump size distribution to follow a natural exponential mixture family at all points of time. Examples for applications of this result in financial engineering are provided.

  • (2013) Shao, Chengwu
    Thesis
    The evolution of commodity markets calls for advanced models to capture and analyze complex properties of the markets. This dissertation focuses on a large sector: the US natural gas market, and consists of three papers where three stochastic models are proposed to investigate the distinct characteristics of the market. Model parameters are estimated by maximizing the likelihood functions with the aid of the Kalman filter and the Kim filter. The first paper explores the multi-factor structure and risk premiums implied from the natural gas spot and futures. The model features a two-short-term/one-long-term structure, time-varying risk premiums and a seasonal risk premium. We find that three factors and the seasonal risk premium are needed to accurately describe the term structure of the natural gas futures. The coefficients for the time-varying risk premiums are significant. We also reveal a negative correlation between the seasonal risk premium and the uncertainty of the natural gas total consumption. The second paper deals with the changing slope of the natural gas futures long-end curve. We develop a Markov regime-switching model with a regime-dependent drift term under the equivalent martingale measure. The model has two factors and three regimes to capture three basic cases of the changing slope. The estimation results show that the model is able to produce a downward/flat/upward slope in each regime and classifies the regime status generally consistent with the observation. Through detailed model comparisons, we find that models without the regimes or the two factors lead to poor results. The third paper considers the variance dynamics of the natural gas futures returns. We directly model and estimate the variance dynamics. The model incorporates two variance factors, the Samuelson effect and seasonality. The estimation is implemented using a dataset of synthesized variance swap rates on the futures across the term-structure dimension. The rates are computed by integrating prices of relevant futures options across the strike dimension. The results indicate the existence of the Samuelson effect, seasonal variance and a negative variance risk premium. In addition, the two-factor setup exhibits its advantage along the term-structure dimension.