PhD, University of Cincinnati, 2010, Arts and Sciences: Mathematical Sciences

Based on the Merton's problem and the concept of indifference pricing methodology, the author develops a pair of uncoupled partial differential equations to find the fair price of a single illiquid financial security. The equations are developed by two different methods, and the results are consistent. Furthermore, a vector indifference pricing framework is conjectured for multiple securities valuation. The pricing method is applied on financial contract that could not be traded during valuation period and the liquidity premium is revealed. Especially, this method could be applied on private equity valuation problem. Another pricing equation using the concept of consistent pricing is also developed in this paper. Moreover by applying variable transformation technique on the Basic Equity Model, an integral from solution is found on the public equity valuation problem under interest rate risk.

Committee: Srdjan Stojanovic PhD (Committee Chair); Bingyu Zhang PhD (Committee Member); Anthony Leung PhD (Committee Member); Philip Korman PhD (Committee Member) Subjects: Mathematics

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:

PHD, Kent State University, 2012, College of Business and Entrepreneurship, Ambassador Crawford / Department of Finance

Risks in the banking industry occasionally come into the public spotlight due to events such as the recent financial crisis. This study examines risk characteristics of bank holding companies (BHCs) based upon their use of interest rate derivatives. Prior research examining interest rate derivatives in BHCs is based upon data prior to the required segregation indicating whether or not derivatives are used for trading. This research uses segregated derivative data. BHCs are divided into those using no derivatives, those using non-trading derivatives, and those using both trading and non-trading derivatives. Differences in both interest rate sensitivity and overall firm risk between BHCs of differing derivative types are analyzed. Evidence indicates BHCs using non-trading derivatives have higher interest rate sensitivity than those using no derivatives. In addition, BHCs using both non-trading and trading derivatives have greater interest sensitivity than BHCs using only non-trading derivatives. BHCs using derivatives regardless of type do not exhibit greater overall volatility than BHCs using no derivatives. Selective hedging, partially but not fully hedging a risk exposure, is also examined. BHCs successfully trading in derivatives must invest in personnel with the requisite expertise. It is plausible these BHCs would leverage this expertise to selectively hedge in their non-trading portfolio. Whether or not these BHCs selectively hedge is inconclusive. However, in most instances, derivative positions in the non-trading portfolio of these BHCs are advantageous. Whether operational hedging is a substitute for or a complement to financial hedging is also explored. Prior research limits operational hedging in BHCs to merger and acquisition activity. This research examines operational activities involving geographic diversification, loan diversification, and non-interest income diversification. Evidence supports these operational activities act as hedges and are subst (open full item for complete abstract)

Committee: John Thornton (Committee Chair); Jayaram Muthuswamy (Committee Member); Eric Johnson (Committee Member); Indrarini Laksmana (Committee Member) Subjects: Banking; Finance

PHD, Kent State University, 2008, College of Business and Entrepreneurship, Ambassador Crawford / Department of Finance

This dissertation empirically evaluates the relations among macroeconomic variables, systematic risk factors, and market valuation ratios. Market valuation ratios are utilized as proxies for investors' expected or required returns. As such they are impacted both by changes in expected economic activity and by changes in perceived risk levels. To better understand the relations between market valuation ratios, economic changes, and risk factors, this dissertation undertakes three related analyses.The first essay, “In Search of a Better Market Earnings Yield (E/P) and a Better Market Dividend Yield (D/P),” evaluates the relations between market valuation ratios and the components of interest rates, with controls for various factors. This essay demonstrates that interest rates are related to valuation ratios and that adjusting for this identified relation improves the utility of valuation ratios in forecasting market returns. The second essay, “Systematic Risk Factors and Cash Flow Factors and Their Relations to Market Valuation Ratios as Proxies for Investors' Required or Expected Returns,” evaluates the effects of state variables on market valuation ratios, specifically the E/P ratio and the D/P ratio. This essay identifies which macroeconomic or state variables represent or capture systematic risk factors and which macroeconomic variables affect investors' expected returns, as measured by market valuation ratios. The third essay, “SMB and HML: Risk Factors?”, evaluates if SMB (Small Minus Big return differentials based on the total size of market equity) and HML (High Minus Low return differentials based on book-to-market ratios) do worse relative to other equity investments in “bad” times and thus warrant a return premium as compensation for this “risk” factor. Based on this evaluation, this essay corroborates that SMB is a risk factor but provides evidence that HML is actually a contra-risk factor. In summary, this dissertation studies the relations among risk (open full item for complete abstract)

Committee: John Thornton Dr. (Committee Co-Chair); Richard Curcio Dr. (Committee Co-Chair); Michael Ellis Dr. (Committee Member) Subjects: Finance

Doctor of Philosophy, Case Western Reserve University, 1991, Accounting

The rapidly increasing use of interest rate swaps has accentuated the need for informative corporate reporting of swap transactions. This cross-sectional study of 165 firms examines issues associated with the separation of corporate ownership and control, and with the function of financial disclosure in mitigating conflicts between shareholders and managers. It is argued that (1) managers have incentives to use interest rate swaps opportunistically, and to limit disclosure of associated information important to investors, and (2) the use and disclosure of interest rate swaps is related to both the credit risk and the ownership structure of a firm. Since managers' incentives for using swaps cannot be measured directly, a measure of disclosure quality is developed to serve as the dependent variable. The quality of disclosure reflects managers' decisions to either disclose or to withhold private information. Independent variables include measures of the disclosing firm's credit risk and ownership structure. Confirmatory Factor Analysis (CFA) was used to test a credit risk model which incorporates variables found to be significant in related studies. The CFA model provides measures of the size, unique risk, and market-related risk of firms in the study. Factor scores for these three latent credit risk variables served as independent variables in multinomial logit tests of hypotheses related to disclosure quality. Although findings did not confirm the expected relationship with credit risk, a model relating ownership structure to the quality of disclosure includes significant coefficients for managerial ownership and size. Results indicate that disclosure quality declines with increases in firm size. Disclosure quality is expected to reflect increases in managerial ownership by both (1) increasing due to a convergence of interests with owners and (2) decreasing due to the growing entrenchment and discretion of managers. The nonlinear relationship hypothesized to arise fr (open full item for complete abstract)

Committee: Gary Previts (Advisor) Subjects: Business Administration, Accounting