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(2010)ThesisThis 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.
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(2011)ThesisThis 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.
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(2010)ThesisThis thesis investigates the dynamics of trading behaviour and provides a comprehensive assessment of the overall performance of all Finnish retail and institutional investors over the years 1995 through 2004 using detailed transaction data on daily trades and investor identities. In contrast to prior published studies for Finland, this study reveals a significantly superior performance achieved by households over institutions in the longer run, either before or after the trading expenses. Despite much lower transaction costs, institutions trade several times as much as the most active household age group that reduces their net return as much as for households. I also find institutional trading is the key contributor to the volatility of Nokia share price. This study further examines the trading performance of individual investors across gender and age bands and documents both males and females in their thirties are the best performing traders among their respective gender groups on either a gross or net basis. In term of gender, male groups show significantly higher turnover while females hold higher-risk stocks. Frequent trading reduces men’s net return more so than do women in all age groups. The life cycle hypothesis does not seem to apply to Finnish working males nearing retirement after Nokia price crashed in 2000. This age group of 60 to 69 were net buyers of Nokia shares, and hence does not indicate a movement out of a high-risk investment into cash or bonds. I find strong evidence of correlated trading among household groups with young and middle-aged males sharing the highest cross correlations between their contemporaneous buy intensity. The level of correlated trading is surprisingly persistent and increases year by year. This finding suggests that profitable herding behaviour encourages more information sharing among households over time.
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(2011)ThesisThis thesis presents three related essays on the impact of geographical location for U.S. mutual funds. The U.S. mutual fund industry is chosen as a laboratory for this thesis given its size and maturity. The thesis investigates the implications of fund company location on fund performance, strategy, money flows and fee competition, and its effect on the home bias of fund companies. The first essay examines the performance, strategy, and money flows of fund managers when they relocate within the U.S. The findings suggest decreased risk-adjusted fund performance following a manager’s relocation that cannot be attributed to strategy changes. Investors react to fund manager relocations with reduced fund flows. Funds that relocate from urban to rural areas experience increased flows after relocating. The second essay investigates the implications of Van Nieuwerburgh and Veldkamp’s (2009) equilibrium model of learning and portfolio choice for relocating mutual funds. The essay analyses the stock selection of managers that relocate relative to their former bases and new locations. This thesis finds that relocating firms form a significant new bias towards their new premises, and, post-relocation, new portfolio holdings deliver better performance than the former holdings. Relocating fund managers mimic the portfolios of their new neighbours, suggesting the relevance of word of mouth or information diffusion as a source of new information. Fund managers tend to relocate to the new premises with high local concentrations of their peers relative to available local stocks. The third essay examines fee competition in the mutual fund industry using a geographical instrument. The essay argues, based on recent studies, that geographical proximity to financial centres is related to fund performance due to information quality considerations and investigates its correlation with fund Management Expense Ratios (MERs). The results show that within selected financial centres – Boston, Chicago, Los Angeles, New York, Philadelphia, and San Francisco – the MERs of local funds are lower than those of distant funds after controlling for well-established determinants of fund expenses. The differences in fund MERs are stronger among similar funds, and cannot be attributed to the differences in fixed costs in each financial centre. Our findings suggest that fee setting in the U.S. mutual fund industry is competitive.
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(2011)ThesisThis dissertation consists of three stand-alone research projects on large shareholders, corporate environments and firm valuation. The first study investigates reporting transparency, corporate control and corporate diversification as determinants of financial institutional blockholdings by using a unique dataset of financial institution ownership in 2002 and 2006. I find financial blockholders are likely present in firms with better reporting transparency, lower expropriation risk and higher corporate diversification. Importantly, financial blockholders are more likely to rely on firm-level attributes when selecting firms with relatively poor information environments or firms located in countries with a weak governance environment. Overall, the study highlights the importance of firm-level attributes in large ownership acquisition decisions of financial institutions. The second essay provides a new empirical analysis of determinants of corporate ownership structure involving multiple blockholders. The results generally support the predictions from multiple-block theories in relation to competition for control. There is also some evidence supporting the theory of governance through “threats of exit”. Multiple blockholder structures are more prevalent in firms with high disclosure quality, abundant free cash flows and strong operating performance, but less frequent in matured, large and regulated firms, and firms with high turnover and firm-specific risk. Multiple blockholders are likely to emerge when one of the blockholders is an independent financial institution or there are no controlling shareholders in the firm. Most of the above factors are also important in determining an ownership structure with multiple financial institutional (minority) blockholders, but the theory of governance through “threats of exit” is more supportive in the setting of multiple financial blockholders. The third essay investigates the association between multiple blockholders and firm valuation. Theoretically, multiple large shareholders can engage in efficient monitoring or in the extraction of private benefits through expropriation. The study finds the presence and number of multiple blockholders, beyond the largest shareholder, are negatively related to firm valuation. Additional evidence also suggests that the role of multiple blockholders might also vary with a firm’s information and institutional environments. The negative link between multiple blockholder structure and firm valuation is more pronounced in firms with relatively poor information environments, or firms located in countries with a weakly enforced governance environment. Overall, this study supports the coalition formation hypothesis that multiple large shareholder are prone to form a controlling formation and be in cahoots with each other to divert corporate resources for private benefits, thereby reducing firm value.
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(2011)ThesisAs traditional contingent claims valuation methods do not apply to non-transferable and non-hedgeable contingent claims, recent proliferation of such claims creates the need for the development of new valuation methods. Further, the essential role of executive stock options (henceforth ESOs) in current economic system makes their valuation a necessity for optimally allocating resources and incentivizing executives. In this thesis, I offer a novel method of valuating non-transferable, non-hedgeable (henceforth NTNH) contingent claims and then implement this method in pricing ESOs. I find that NTNH constraints break the local co-linearity caused by including contingent claims in solving the portfolio optimization problems. Thus, I am able to translate the portfolios that include contingent claims optimization problems into primary assets only portfolios optimization problems, by replicating contingent claims using primary assets. I integrate the NTNH constraints into one single rectangular constraint, under which solving the portfolio optimization problem identifies the pricing stochastic discount factor. I then use this stochastic discount factor to price the NTNH contingent claims and implement the method in pricing ESOs. I investigate both block exercise and continuous partial exercise, and derive the first order conditions with respect to optimal exercise rates for continuous partial exercise case. The priced assets could also be pensions, human capital, real estate, etc. I also address default NTNH contingent claim valuation. I extend the above model by introducing default primary assets which help replicating default contingent claims. Again, I derive a stochastic discount factor to price the default NTNH contingent claims. I implement the valuation method in pricing ESOs with job termination. Finally, I apply NTNH contingent claims valuation method to reload options pricing, again, by replication, solving portfolio optimization problems, and identifying the appropriate stochastic discount factor. I start in an unconstrained setting and find that as the frequency of reload increases the optimal reload policy evolves from an optimal stopping time into a barrier hitting time. The barrier is the historically high price, and the number of replicating shares converges. As the mature- stock-for-strike convention being added into the reload option exercise policy, if the vesting period for stock and option are optimally chosen, then the option quality measure, the incentive per unit dead weight cost will be increased.
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(2011)ThesisThis thesis is the first to investigate the association between market competition, the choice between dividends and stock repurchases as payout methods, and dividend smoothing. Using a sample of U.S. firms in the period 1963-2009, I find that firms in highly competitive industries prefer to pay out through repurchases rather than dividends, perhaps because they are less capable of maintaining stable future profitability. Before 1982, regulatory constraints prevented firms from aggressive repurchase programs. In the post-1982 period, as the introduction of Rule 10b-18 removed the regulatory constraints on repurchases, firms in highly competitive industries demonstrated significantly decreased preferences for paying out dividends and increased preferences for repurchases, which implied substitution of dividends with repurchases. I also show that dividend payers in highly competitive industries tend to keep dividends at a relatively persistent level and distribute increases in earnings through repurchases, thus their dividend levels are smoother than those in less competitive industries. Further, I also confirm the hypothesis of Grullon and Michaely (2007) that high competition is associated with high payout levels.
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(2011)ThesisThis thesis investigates the role of macro corporate governance in determining the price sensitivity of rivals at acquisition announcements by employing a large sample of 8006 mergers and acquisitions (M&As) and related rival firms across 46 countries spanning January 1990 to December 2009. The empirical results show that macro corporate governance and legal environments have significant impacts on abnormal returns to rivals at acquisition announcements. More specifically, a stable political situation, efficient regulation enforcement, strict corruption control, the absence of daily share price limits, good shareholder protection as well as high financial information transparency increase the abnormal returns to rivals, whereas strong creditor rights reduces the price sensitivity of rivals. Moreover, the results remain valid if we employ firm-level corporate governance, that is, rivals with better firm-level corporate governance ratings exhibit high price sensitivity at M&A announcements. Our results are not driven by the dominant sample country, and are valid even after controlling for deal types (horizontal/vertical/conglomerate/cross-border), firm-level characteristics (relative firm size, book-to-market ratio, dividend payout ratio, return on equity, price-earnings ratio, stock return volatility, earning management, debt-to-equity ratio, stock turnover, firm growth), industry concentration and stock market development.
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(2010)ThesisThis thesis studies four related topics in financial economics; realized volatility modelling and forecasting in the presence of model instability, forecasting stock return realized volatility at the quarterly frequency, quarterly realized beta measurement and beta neutrality evaluation under a popular long short strategy. Recent advances in financial econometrics have allowed for the construction of efficient post measures of daily volatility. The first topic investigates the importance of instability in models of realized volatility and their corresponding forecasts. Testing for model instability is conducted with a subsampling method. We show that removing structurally unstable data of a short duration has a negligible impact on the accuracy of conditional mean forecasts of volatility. In contrast, it does provide a substantial improvement in a model's forecast density of volatility. In addition, the forecasting performance improves, often dramatically, when we evaluate models on structurally stable data. The second topic is on forecasting stock return volatility at quarterly level. The last decade has seen substantial advances in the measurement, modeling and forecasting of volatility which has entered around the realized volatility literature. To date, most of the focus has been on the daily and monthly frequency, with little attention on longer horizons such as the quarterly frequency. In finance applications, forecasts of volatility at horizons such as quarterly are of fundamental importance to asset pricing and risk management. In this chapter we evaluate models for stock return volatility forecasting at the quarterly frequency. We find that an autoregressive model with one lag of quarterly realized volatility produces the most accurate forecasts, and dominates other approaches, such as the recently proposed mixed-data sampling (MIDAS) approach. Chen and Reeves (2009) introduced a new beta measurement technique via the Hodrick-Prescott filter and found it substantially reduced measurement error and produced much better performance than Fama-MacBeth measurement approach at the monthly frequency. The third chapter extends this technique to quarterly beta measurement. The finding in Chen and Reeves (2009) is also confirmed at the quarterly frequency. Hodrick-Prescott filtered beta contains the most relevant information and follows closely the true underlying beta. This result is also used in the final chapter to construct the proxy for the true underlying quarterly beta time series. The final topic is to investigate the economic value of realized beta. Market neutral funds are commonly advertised as alternative investments offering returns which are uncorrelated with the broad market. Utilizing recent advances in financial econometrics we demonstrate that constructing market neutral funds from monthly return data can be widely inaccurate. Given the monthly frequency is the most common for return measurement in the hedge fund industry, our findings highlight the need for higher frequency return data to be more commonly utilized. We demonstrate the use of daily returns to achieve a more market neutral portfolio, relative to the case of only using monthly returns.
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(2010)ThesisWe examine three aspects of investors’ divergence of opinion in the context of takeovers. First we examine the effect of divergence of opinion and short sale constraints on merger announcement returns. To our knowledge, no study has analysed this combined effect for acquirers and targets. Using a sample of 565 Australian acquirers and 442 targets we find that relative spread and order imbalance (proxies for divergence of opinion), significantly affect acquirer returns. This provides information to investors wanting to assess the impact on bidder returns of an impending merger. The evidence of an impact on target returns is weak. Neither of our proxies for short sale constraints (level of institutional ownership or short selling ban), present a significant relationship with acquirer returns. The relationship with target returns is very weak. Second, we examine the effect of the market reaction to a takeover announcement in conjunction with divergence of opinion on deal success. To our knowledge, no study has analysed this joint effect. We apply logistic regressions using a sample of 774 Australian acquirers and 584 targets and find some evidence that managers in takeover negotiations listen to the acquirer market reaction to the announcement when deciding whether to complete a deal or withdraw from it. We do not find evidence of managers listening to the target market reaction. Additionally, we find that deal success has a significant positive relationship with relative spread and a significant negative relationship with order imbalance, variables which proxy for divergence of opinion. Third, we examine the impact of divergence of opinion on merger arbitrage investment strategies. To our knowledge, no study has analysed this mpact. We find that by using divergence of opinion to predict takeover success, we can build a merger arbitrage portfolio that earns higher Fama and French (1993) adjusted excess returns than a typical portfolio where arbitrageurs invest in all announced deals. However, the portfolio is small and its performance sensitive to the window used to calculate the returns and the divergence of opinion proxies. The models that provide the highest merger arbitrage returns use relative spread or order imbalance to proxy for divergence of opinion.