Doctor of Philosophy, The Ohio State University, 2015, Business Administration

This dissertation examines what factors determine the cross-section of returns. It contains three chapters. Chapter 1 investigates whether uncertainty shocks can explain the value premium puzzle. Intuitively, the value of growth options increases when uncertainty is high. As a result, growth stocks hedge against uncertainty risk and earn lower risk premiums than value stocks. An investment-based asset pricing model augmented with time-varying uncertainty accounts for both the value premium and the empirical failure of the capital asset pricing model (CAPM). This study also shows that uncertainty shocks influence cross-sectional investment. Uncertainty has a negative impact on the investment of value firms, while it has a positive impact on the investment of growth firms. Chapter 2 shows that uncertainty shocks can explain the negative relation between idiosyncratic volatility and expected returns in Ang, Hodrick, Xing and Zhang (2006, 2009). The main intuition is that idiosyncratic volatility amplifies the positive impact of uncertainty shocks on the value of growth options. Therefore, everything else being equal, growth stocks with higher idiosyncratic volatilities perform better than growth stocks with lower idiosyncratic volatilities when uncertainty is high, and consequently have lower expected returns. Using an investment-based asset pricing model with time-varying uncertainty, I show that the idiosyncratic volatility puzzle exists only in stocks with low book-to-market ratios (growth stocks). The spread in loadings on uncertainty shocks can explain why growth stocks with high idiosyncratic volatilities earn lower average returns than those with low idiosyncratic volatilities. In Chapter 3, co-authored with Kewei Hou, Chen Xue, and Lu Zhang, we hand-collect data on total assets and earnings from Moody's Industrial Manual to extend the sample for the q-factors back to 1926. We also compare the q-factor model with the Carhart (1997) model in capturing a (open full item for complete abstract)

Committee: Lu Zhang (Committee Chair); Xiaoji Lin (Committee Member); Ingrid Werner (Committee Member) Subjects: Finance

Doctor of Philosophy, The Ohio State University, 2007, Business Administration

The Capital Asset Pricing Model (CAPM) developed by Sharpe (1964)and Lintner (1965) is widely viewed as one of the most important contributions to our understanding of finance over the last 50 years. The CAPM predicts that non-diversifiable risk (beta) is the only risk that matters for the pricing of assets, and that an asset's expected return is a positive linear function of its non-diversifiable risk. However, the empirical performance of the CAPM has been poor. This poor performance may reflect theoretical failings. Alternatively, it may be due to difficulties in implementing valid tests of the model. This dissertation focuses on the second possibility. In the first essay I develop a Bayesian approach to test the cross-sectional predictions of the CAPM at the firm level. Using a broad cross-section of NYSE, AMEX, and NASDAQ listed stocks over the period July 1927 - June 2005, I find evidence of a robust positive relation between beta and average returns. Fama and French (1993) propose two additional risk factors related to firm size and book-to-market equity. I find no evidence that these additional risk factors help to explain the cross-sectional variation in average returns. These results are consistent with the empirical predictions of the CAPM. The use of portfolios as test assets in cross-sectional tests of asset pricing models is widespread, principally to help mitigate statistical problems. However, there is a considerable theoretical literature showing that the use of portfolios can make bad models look good, and good models look bad. In the second essay I investigate whether inferences from portfolio level studies can be generalized to the firm level. Using the Bayesian approach developed in the first essay, I find that inferences at the portfolio level are closely linked to the way in which portfolios are formed, rather than the underlying firm level associations. These results raise questions about what we can really learn from empirical asset pricing (open full item for complete abstract)

Committee: Rene Stulz (Advisor) Subjects:

Doctor of Philosophy, The Ohio State University, 2006, Business Administration

In this dissertation, I investigate the effect of liquidity risk on asset pricing. In the first essay, I test the liquidity-adjusted capital asset pricing model (LCAPM) of Acharya and Pedersen (2005) for 1962-2004 in the US market using various liquidity proxies. In a time-series test with a one-factor (market model), three-factor (excess market return, SMB, and HML) and four-factor model (excess market return, SMB, HML and MOM) as well as in a Fama-MacBeth regression, I find that test results vary according to the liquidity measures used, to the test methodology, to the test assets, and to the weighting scheme. Tests based on the liquidity measure of Amihud (2002), Pastor and Stambaugh (2003) and zero-return proportion show some evidence that liquidity risks are priced, but in most cases, I could not find evidence that supports the LCAPM. The second essay specifies and tests an equilibrium asset pricing model with liquidity risk at the global level. The analysis encompasses 25,000 individual stocks from 48 developed and emerging countries around the world from 1988 to 2004. Though I cannot find evidence that the LCAPM holds in international financial markets, cross-sectional as well as time-series tests show that liquidity risks arising from the covariances of individual stocks' return and liquidity with local and global market factors are priced. Furthermore, I show that the US market is an important driving force of world-market liquidity risk. I interpret our evidence as consistent with an intertemporal capital asset pricing model Merton (1973) in which stochastic shocks to global liquidity serve as a priced state variable. The third essay investigates how and why liquidity is transmitted across stocks. In a vector autoregressive framework, I uncover a dynamic interaction of liquidity across size portfolios in that past changes of liquidity of large stocks are positively correlated with current changes of liquidity of small stocks. Furthermore, liquidity spillov (open full item for complete abstract)

Committee: G. Andrew Karolyi (Advisor) Subjects: Economics, Finance

PhD, University of Cincinnati, 2023, Business: Business Administration

This dissertation consists of three essays studying the cross-section of asset returns using new empirical approaches. In Essay 1, I forecast firm-level expected growth via machine learning and study the relationship between the expected growth and future stock returns. In Essay 2, I study the drivers of stocks' migration across BE/ME portfolios and how the migration affects the value premium. In Essay 3, I study the protection effect on corporate bonds issued by state-owned enterprises. Essay 1: Expected growth is an important firm fundamental variable but is unobservable and difficult to estimate. In this study, I apply machine learning (ML) to forecast growth at the firm level. Compared with conventional linear regression, ML models produce more accurate forecasts out of sample. Among the ML models, non-linear models perform the best. In particular, the gradient boosting regression reduces the mean and median forecast errors by 9.52% and 20.95%, respectively, relative to linear regression. Moreover, the ML-based growth measure exhibits sensible properties at the firm level, in subsamples, and at the aggregate level. Consistent with theory, the firm-level expected growth predicts cross-sectional stock returns positively, controlling for past growth. Firms in the top decile of the expected change in growth beat those in the bottom decile by an average of 0.56% per month (t = 4.49), which cannot be explained by most benchmark models. The aggregate expected change in growth also forecasts stock market returns positively over a period ranging from 24 months to 60 months. Essay 2: In this paper, we revisit the migration of stocks across BE/ME portfolios contributing to the value premium. We seek to address an unanswered question in Fama and French (2007) regarding the underlying drivers of this migration. We investigate whether the movement of stocks is affected by changes in fundamental characteristics or is merely a result of random fluctuations. Our an (open full item for complete abstract)

Committee: Chen Xue Ph.D. (Committee Chair); Yan Yu Ph.D. (Committee Member); Tong Yu Ph.D. (Committee Member); Michael Ferguson Ph.D. (Committee Member) Subjects: Business Administration

Doctor of Philosophy, The Ohio State University, 2023, Economics

In these essays, I explore the role of microeconomic heterogeneity on understanding macroeconomic dynamics. Specifically, I seek to examine how shareholder preference distributions shape corporate firm behavior, and how that corporate investment behavior trickles up to aggregate outcomes. In the first chapter, I address the question, “Does household wealth and income inequality influence the decision-making of corporate firms?”. I study a DSGE model featuring aggregate risk, incomplete markets, households that vary in labor income and wealth, and shareholder-owned firms. With household heterogeneity and incomplete markets, shareholder value is not well defined. I resolve this classic problem with a mutual fund that holds the production firms and a private equity sector that forces producers to maximize their net market value (or cum-dividend share price). These intermediaries identify the equilibrium market stochastic discount factor (SDF) as a function of the wealth distribution. My model features endogenous stock market trade and a discount factor derived from equilibrium outcomes, which is unique in this class of models. I use this model to study the interaction between firm behavior and different types of household inequality. I find the increase in household earnings risk observed from 1970 to 2010 causes firms to accumulate more capital, lowering consumption volatility, and explaining 55 percent of the observed decline in dividend yields. I then examine the role of wealth inequality through unanticipated redistribution shocks. More inequality leads to higher investment, wages, and output, though at a significant welfare cost to poor households. In the second chapter, I examine the role of common ownership in shaping aggregate outcomes in a riskless environment. Recent research in Industrial Organization and Finance suggests that shareholders who own large stakes in competing firms can cause those firms to compete less vigorously with each other. This con (open full item for complete abstract)

Committee: Aubhik Khan (Advisor); Kyle Dempsey (Committee Member); Julia Thomas (Committee Member) Subjects: Economics

PhD, University of Cincinnati, 2020, Business: Business Administration

Risk plays a central role in financial markets. Households and companies adjust their consumption and investment behaviors, respectively, when facing risk. Financial markets then react to the adjustments accordingly. Whereas a positive risk-return relation is the first fundamental law of finance, however, empirical evidence does not always support such implication. My dissertation focuses on identifying the disagreements between existing asset-pricing theories and empirical evidence, and proposing new explanations that reconcile the disagreements. Essay 1 studies how aggregate consumption responds to macroeconomic shocks. Essay 2 shows how the revisions in aggregate consumption estimates affect the measure of asset prices. Essay 3 demonstrates how financial constraints affect corporate payout and investment policies. Essay 1: Leading consumption-based asset-pricing models have two major implications: First, investors expect higher future stock market returns when the expected stock market volatility increases. Second, stock market prices decrease monotonically with stock market volatility. Neither implication, however, is supported by data. In the first essay, I introduce a consumption-based model featuring two, fear and euphoria, variances to jointly explain the unstable relation between stock market variance and return, and between stock market variance and price. I also present empirical evidence that supports the model implications. Essay 2: We document novel empirical support for the CCAPM. Real-time consumption has significant explanatory power for the cross-section of expected stock returns, while previous studies have found elusive results using revised latest-vintage data. We also lends support to Kroencke's (2017) conjecture that the Bureau of Economic Analysis filters consumption data by showing that it does so gradually through revisions. The revised data perform poorly in the CCAPM estimation because they are heavily filtered and contain substant (open full item for complete abstract)

Committee: Hui Guo Ph.D. (Committee Chair); Brian Hatch Ph.D. (Committee Member); Hernan Moscoso Boedo Ph.D. (Committee Member) Subjects: Business Administration

Doctor of Philosophy, The Ohio State University, 2018, Business Administration

My dissertation consists of three sole-authored essays that study global stock returns. The first one “Global Anomalies” estimates the aggregated return predictability of 117 U.S. anomalies across 40 countries. These anomaly variables generate substantial return predictability when they are aggregated within the same category as defined in Hou, Xue, and Zhang (2015) using composite measures. Combining all six categories of anomaly variables into one single composite measure, a global hedge portfolio generates an average equal (value)-weighted monthly return of 2.15% (1.20%) with a t-statistic of 9.22 (4.66). These results highlight the importance of using composite measures to summarize the information contained in individual anomaly variables. The second essay “Risk or Mispricing? Cross-Country Evidence on Anomaly Returns” follows the same methodology from the first one to aggregate individual anomalies, and aims to explain 5 major anomalies (momentum, value-growth, investment, profitability, and trading frictions) by studying their return variation across countries. Using data from 40 countries over the past 35 years, I show that anomaly returns are highly correlated with measures of market efficiency, investor protection, limits-to-arbitrage, and investor irrationality. Evidence strongly supports a rational risk pricing theory for momentum and profitability effects, and a mispricing theory for the value-growth effect. The result is mixed for investment and trading frictions effects, suggesting that both forces may be at work. These findings extend the existing understanding on the economic sources behind each anomaly and are more robust in the presence of data mining issues in the literature. In the third chapter “The Impact of Price Limits on Stock Volatility and Price Delay: Evidence from China”, I focus on the Chinese stock market and study how market interventions affect price behaviors. To overcome challenge in identification, I first match firms by ch (open full item for complete abstract)

Committee: Kewei Hou (Advisor); Lu Zhang (Committee Member); Justin Birru (Committee Member) Subjects: Finance

Master of Arts, Miami University, 2017, Economics

Significant attention in the financial economics literature is given to the usage of aggregated factors in their ability to explain variability in asset returns. Whereas the Capital Asset Pricing Model (CAPM) considers the excess return on the market portfolio as the dominant source of systematic variability in asset returns, the framework of Arbitrage Pricing Theory (APT) suggests that systematic risk can be further decomposed into numerous common risk factors that underlie co-movement in asset returns. Chen, Roll, and Ross (1986) popularized empirical evaluation of macroeconomic indicators in their relation to asset returns, finding that macro-economic indicators can be useful to price assets and carry statistically significant risk premiums in sample. Following the intuition of the Roll (1977) critique, I consider the pricing of risk derived from unexpected shocks, or innovations, to a wider set of macroeconomic and capital market variables. I find that information contained in shocks to common risk factors is significantly priced in the cross-section of asset returns and differs from information contained in the Fama-French-Carhart factors.

Committee: Thomas Boulton Ph.D. (Advisor); George Davis Ph.D. (Committee Member); Tyler Henry Ph.D. (Committee Member) Subjects: Economics; Finance

MS, Kent State University, 2014, College of Education, Health and Human Services / School of Foundations, Leadership and Administration

The objective of this research is to investigate the core financial analytical competencies that hospitality managers must possess. Similar measurement was employed in both the industry practitioners' and the educators' survey, as the aim was to explore the importance and use of revenue and cost management competencies among manager participants and compare the findings with those obtained from the educators' survey. The results of this study showed that cost control, followed by revenue management, budgeting, forecasting, pricing, and asset management, are the essential financial competencies of hotel managers. The perception gap was found between hospitality managers and educators on the importance of these financial competencies. The findings of this study could provide suggestions for hospitality education and industry training programs.

Committee: Ning-Kuang Chuang (Committee Chair); Amy Gregory (Committee Member); Aviad Israeli (Committee Member) Subjects: Management

Master of Arts, Miami University, 2014, Economics

We use various samples of portfolios (Fama-French portfolios formed on size and book-to-market, Fama-French industry portfolios, and exchange traded funds) as test assets to investigate whether the negative relation between lagged idiosyncratic volatility (IVOL) and future average returns initially documented by Ang, Hodrick, Xing, and Zhang (2006) is due to a missing risk factor. Analytically, we show that if IVOL proxies for a missing risk factor, then the negative relation between IVOL and returns persists at a portfolio level since systematic risk is not eliminated through diversification. However, when we take it to the data, we do not find economically and statistically significant evidence of a relation between lagged IVOL and subsequent average returns. Taken together, our results suggest that the IVOL puzzle is not due to a missing risk factor.

Committee: Haimanot Kassa Ph.D. (Advisor); Tyler Henry Ph.D. (Committee Member); George Davis Ph.D. (Committee Member) Subjects: Economics; Finance

BS, Kent State University, 2014, College of Arts and Sciences / Department of Mathematical Sciences

This honors thesis explains the underlying concepts of risk assessment in a systematic way and introduces several widely-used risk assessment methodologies including standard deviation, risk premium, Sharpe ratio, Capital Asset Pricing Model and Value at Risk supplemented with straightforward examples. The purpose of this thesis is to assist students who have only basic finance and mathematics background to integrate both complicated financial and mathematical perspective of risk assessment in order to understand more advanced risk assessment methods in future studies. Real stock price data are used in examples to demonstrate the characteristics and validity of each risk assessment methodology. From all the data analyses for risk assessment methods mentioned, they reveal the fact that all the methods have their own advantages and disadvantages. All the advantages and disadvantages are explained in this thesis as well. After reading this thesis, readers should expect to be able to answer questions about basic concepts of risk assessment and characteristics of risk assessment methodologies listed above.

Committee: Richard Shoop (Advisor); Darci Kracht (Committee Member); Lightner Douglas (Committee Member); Brett Ellman (Committee Member) Subjects: Finance; Mathematics

Doctor of Philosophy, The Ohio State University, 2014, Business Administration

This dissertation examines the modeling of asset prices in production economies. Chapter 1 presents a model which endogenizes a key mechanism of many theories of aggregate asset prices. In order to generate time-varying risk premia, many theories assume time-varying volatility. Chapter 1 shows that this channel can be endogenized with precautionary saving motives. Precautionary motives prescribe that, in bad times, next period's consumption should be very sensitive to economic news. High sensitivity in bad times results in time-varying consumption volatility, even in the presence of homoskedastic shocks. This channel is made visible by modeling production, and is amplified with external habit preferences. An estimated model featuring this channel quantitatively accounts for excess return and dividend predictability regressions. It also matches the first two moments of excess equity returns, the risk-free rate, and the second moments of consumption, output, and investment. Chapter 2 shows that the model of Chapter 1 not only addresses aggregate asset prices, but can also be extended to address key facts about the cross section of stock returns. This result is important because a solution to the equity premium puzzle should be informative about risk in general. I add idiosyncratic productivity to the model from Chapter 1. I find that the model's expected returns are log-linear in book-to-market equity, consistent with the data. Moreover, the slope of the relationship is similar. In both the model and the data, a 20% higher book-to-market implies a 100 b.p. increase in expected returns. The result is robust. It requires neither operating leverage nor asymmetric adjustment costs. Rather, value firms are low productivity firms, and mean reversion causes them to have high cash flow growth. This prediction is inconsistent with conventional wisdom, but consistent with recent empirical evidence. I present additional empirical evidence showing that value f (open full item for complete abstract)

Committee: Lu Zhang (Advisor); Xiaoji Lin (Committee Member); René Stulz (Committee Member); Julia Thomas (Committee Member) Subjects: Finance

Doctor of Philosophy, The Ohio State University, 2014, Business Administration

This dissertation examines three distinct questions within the international portfolio choice literature. In chapter one, I study the change in the equity home bias during the financial panic of 2008. Using a sample of 45 countries, I document that the equity home bias fell. This is puzzling because theories of home bias and portfolio choice under uncertainty predict that during a crisis, the home bias should increase. With a novel methodology, I show that the active trades of investors, which increased the home bias, were subsumed by the passive valuation changes in their portfolio holdings, which decreased the home bias. I find evidence consistent with a role for portfolio rebalancing, increased information asymmetries, and the familiarity bias in portfolio allocations during the crisis. In chapter two, I analyze the impact of aggregate changes in U.S. demand for foreign stocks on U.S. firm-level stock prices. Separating U.S. net flows into outflows and inflows, I document that stocks with higher sensitivity to outflows earn significantly lower risk-adjusted returns. High outflows-beta firms tend to be smaller, younger, more volatile, and less globally diversified. Using firm-level, risk-adjusted returns, I find that the significantly negative premium is not subsumed by these characteristics or others commonly associated with misvaluation or limits to arbitrage. I show that the return on an outflows-mimicking portfolio is predictable and largely concentrated during periods when the demand for foreign equity is likely to fall, i.e., following reduced wealth, increased uncertainty, and reduced sentiment. The results are consistent with sensitivity to aggregate changes in U.S. demand for foreign stocks affecting firm-level U.S. stock returns. In chapter three, I study why U.S. investors' foreign portfolio share nearly doubled from 1994 to 2010. Using a sample of monthly bilateral equity holdings between investors in the U.S. and 45 countries, I document that (open full item for complete abstract)

Committee: René Stulz Ph.D. (Committee Chair); Kewei Hou Ph.D. (Committee Member); Ingrid Werner Ph.D. (Committee Member) Subjects: Finance

PhD, University of Cincinnati, 2009, Business Administration : Finance

The central theme of this dissertation is the connection between idiosyncratic risk and returns. In the original literature perfect diversification assumptions eliminate the influence that idiosyncratic risk may have on returns; however, current research shows that once these restrictive assumptions are relaxed, a theoretical role for this particular risk reemerges. The current dissertation empirically investigates the role of idiosyncratic risk in explaining returns. Specifically, the work is organized into two main parts: the first investigates the connection between idiosyncratic risk and momentum, and the second examines the cross-sectional relation between returns and idiosyncratic risk. The core idea of the first part of this dissertation is that, counter to common belief, the link between idiosyncratic risk and momentum should not be regarded as evidence of the irrational nature of the momentum phenomenon. If idiosyncratic risk is priced, time variation in its premia may rationally generate time series phenomena like momentum. Various studies reject the notion that momentum profits are compensation for risk by showing that momentum profits are mostly comprised of idiosyncratic components. This dissertation starts with a few remarks on the current stage of the literature, which help make the point that simply documenting the existence of this connection can say nothing about the nature of the underlying process generating momentum (especially since recent theoretical papers show that idiosyncratic components of returns – in particular idiosyncratic risk – may affect risk premia). Using EGARCH-M, the first essay estimates idiosyncratic risk and idiosyncratic risk premia at the individual security level and shows that idiosyncratic risk premia are responsible for between 70 and 90 percent of momentum profits. Although securities in the loser portfolio have higher levels of idiosyncratic risk than those in the winner portfolio, the idiosyncratic risk premia in th (open full item for complete abstract)

Committee: Michael Ferguson PhD (Committee Co-Chair); Steve Slezak PhD (Committee Co-Chair); Yan Yu PhD (Committee Member) Subjects: Finance

Doctor of Philosophy, The Ohio State University, 2011, Economics

A considerable portion of the asset pricing literature considers the demand schedule for asset prices to be perfectly elastic (flat). As argued, asset prices are determined using information about future payoff distribution, as well as the discount rate; consequently, an asset would be priced independent of its available supply. Furthermore, such a flat demand curve is considered to be a consequence of the Efficient Market Hypothesis. My dissertation evaluates and questions the factuality of these assertions. I approach this problem from both an empirical and a theoretical perspective. The general argument is that asset prices do respond to supply-shocks; and changes in aggregate demand, stemming from preference changes, new international investments, or quantitative easing by the Fed, can result in price changes. Hence, asset prices are determined by both demand and supply factors. In the first essay, “Downward Sloping Asset Demand: Evidence from the Treasury Bills Market,” I report on my empirical study which establishes the existence of a downward sloping demand curve (DSDC) in the T-bill market. In the second essay, “Asset Pricing: Inelastic Supply,” I examine the theoretical issues concerning a downward sloping demand curve. I begin by clarifying a common confusion in the literature, namely, that many asset pricing models imply a flat demand curve. I show that the prominent asset pricing models, including Capital Asset Pricing Model (CAPM), Arbitrage Pricing Theory (APT) and Consumption Capital Asset Pricing Model (CCAPM), all have an underlying DSDC. I further show that, while these models imply the relevance of supply, they are inconvenient as a vehicle for the estimation and analysis of the DSDC in the data. For those purposes, I develop an asset pricing framework based on the stochastic discount factor framework, specifically designed with a DSDC at its heart. I end the essay with a discussion of the framework's implications and applications. In the third (open full item for complete abstract)

Committee: Pok-sang Lam (Advisor); Paul Evans (Committee Member); J. Huston McCulloch (Committee Member) Subjects: Economics

Doctor of Philosophy, The Ohio State University, 2010, Economics

The first essay, “Pricing Housing Market Returns,” finds the housing premium to be smaller than the equity premium. Using state-level data that spans the 1983 to 2006 period, I estimate the asset pricing Euler equations from the intertemporal consumption problem faced by a representative consumer with Epstein-Zin (EZ) preferences. The EZ Capital Asset Pricing Model captures a large proportion of the variation in housing returns over the sample period, and I find there to be heterogeneity in the structural parameter estimates across geographies. Controlling for the risk priced by the model and the consumption value of housing, I find that the housing premium is smaller than the equity premium. This result is surprising given that frictions, such as high transaction costs and borrowing constraints, affect the investor in housing more than the investor in equities. I examine institutional differences between the asset classes and find that some of the difference between the two premia may be related to differences in the tax treatment between the two asset classes. The second essay, “Non-durable Consumption Volatility and Illiquid Assets,” finds that factors beyond the volatility of asset payoffs may significantly affect the volatility of the agent's consumption stream. The empirical failure of consumption-based asset pricing models is often attributed to the lack of volatility in aggregate measures of consumption. However, I illustrate in this paper that frictions faced by agents may lead to much higher levels of volatility in individual consumption than we observe in the aggregate data. I develop a life-cycle model of in which the consumer derives utility from non-durable consumption and stock in a risky asset: housing. Non-convex adjustment costs generate lumpy changes in the stock of the risky asset over the life-cycle. The model predicts that non-durable consumption volatility is increasing in both the ability to borrow against the assets held in the consumer's (open full item for complete abstract)

Committee: Pok-sang Lam PhD (Committee Chair); Donald Haurin PhD (Committee Member); Mario Miranda PhD (Committee Member) Subjects: Economics; Finance

Doctor of Philosophy, The Ohio State University, 2008, Economics

My dissertation addresses two main issues regarding asset returns: econometric modeling of asset returns in chapters 2 and 3 and puzzling features of the standard consumption-based asset pricing model (C-CAPM) in chapters 4 and 5. Chapter 2 develops a new theoretical derivation for the GARCH-skew-t model as a mixture distribution of normal and inverted-chi-square in order to represent the three important stylized facts of financial data: volatility clustering, skewness and thick-tails. The GARCH-skew-t is same as the GARCH-t model if the skewness parameter is shut-off. The GARCH-skew-t is applied to U.S. excess stock market returns, and the equity premium is computed based on the estimated model. It is shown that skewness and kurtosis can have significant effect on the equity premium and that with sufficiently negatively skewed distribution of the excess returns, a finite equity premium can be assured, contrary to the case of the Student t in which an infinite equity premium arises. Chapter 3 provides a new empirical guidance for modeling a skewed and thick-tailed error distribution along with GARCH effects based on the theoretical derivation for the GARCH-skew-t model and empirical findings on the Realized Volatility (RV) measure, constructed from the summation of higher frequency squared (demeaned) returns. Based on an 80-year sample of U.S. daily stock market returns, it is found that the distribution of monthly RV conditional on past returns is approximately the inverted-chi-square while monthly market returns, conditional on RV and past returns are normally distributed with RV in both mean and variance. These empirical findings serve as the building blocks underlying the GARCH-skew-t model. Thus, the findings provide a new empirical justification for the GARCH-skew-t modeling of equity returns. Moreover, the implied GARCH-skew-t model accurately represents the three important stylized facts for equity returns. Chapter 4 provides a possible solution to asset r (open full item for complete abstract)

Committee: J. Huston McCulloch (Advisor); Paul Evans (Committee Member); Pok-sang Lam (Committee Member) Subjects:

Doctor of Philosophy, The Ohio State University, 2004, Economics

This dissertation is composed of two empirical studies on risk management. The first part is an empirical study on income risk and portfolio choice of investors. Recent theoretical work has shown that uninsurable labor income risk likely reduces the share of risky asset investment. Little empirical work has been done to examine this effect. This empirical study on the issue has three novel features. First, the long labor income history in NLSY79 is used to estimate the labor income risk. Second, the study distinguishes between permanent and transitory labor income risk, and estimates them for individuals. Third, I explicitly consider human capital as a component of the portfolio. Human capital is treated as a risk-free asset and estimated using signal extraction technique to labor income data. The study finds strong empirical support for the theory that labor income risk significantly reduces the share of risky assets in the portfolio of an investor. Furthermore, as economic theory suggests, permanent income risk has a significant effect on portfolio choice while transitory income risk has little effect. The second part of the dissertation is an empirical study on the interest rate risk management of banks. Using a rolling sample of bank holding companies from 1986 to 2002, the study investigates how banks adjust their balance sheet maturity structure according to their perception of current and future interest rate changes. Banks tend to lengthen the maturity of net assets when the yield curve is steeply sloped and shorten it when they expect the interest rate to increase in the future. To account for the off-balance-sheet activity effect on interest rate risk exposure, the sample is divided into those with high and low interest rate derivative activities. For banks with little off-balance-sheet interest rate derivative activities, the cross-sectional variation in their responsiveness of maturity structure to interest rate changes explains the stock market risk and (open full item for complete abstract)

Committee: Pok-sang Lam (Advisor) Subjects:

Doctor of Philosophy, The Ohio State University, 2004, Business Administration

This dissertation contributes to the international asset pricing literature. The research it presents in its two essays is related to papers that investigate commonalities in individual stock liquidity in the domestic US setting, to research that estimates risk premia related to liquidity risk in the US, and to articles that explore properties and determinants of market-wide liquidity in the US, while expanding the scope to an international setting. The first essay shows that individual liquidity exhibits commonalities in monthly measures of individual stock liquidity within and across countries for a sample from Japan, the UK, and the US from 1980 to 2001. An asset pricing analysis suggests that expected stock returns are cross-sectionally related to the sensitivity of returns to shocks in global liquidity in this sample and that global liquidity is a priced state variable in an international framework at the portfolio as well as at the individual stock level. The second essay analyzes cross-regional and time-series properties of weekly market-wide liquidity measures from 1990 to 2002 for five regional aggregates: developed Asia, North America, Europe, emerging Asia, and emerging America. The aggregates are calculated from a sample that contains 39 developed and emerging countries. The results suggest that liquidity shocks are contemporaneously correlated and dynamically spread across regions. However, there is only week evidence that liquidity affects returns in this sample. An investigation of determinants of liquidity indicates that market-wide returns, market-wide averages of individual stock volatilities, and world net bond flows are fundamental drivers of market-wide liquidity. There is little evidence that equity fund flows and interest rates consistently affect liquidity in the sample. Even though changes in liquidity can to some extent be explained by returns and other determinants, shocks to liquidity continue to be contemporaneously correlated across mar (open full item for complete abstract)

Committee: René Stulz (Advisor) Subjects: Business Administration, General