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Kim, Young IlEssays on Volatility Risk, Asset Returns and Consumption-Based Asset Pricing
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 return puzzles such as high equity premium and low riskfree rate based on parameter uncertainty. It is shown that parameter uncertainty underlying the data generating process can lead to a negatively skewed and thick-tailed distribution that can explain most of the high equity premium and low riskfree rate even with the degree of risk aversion below 10 in the CRRA utility function.

Chapter 5 investigates a possible link between stock market volatility and macroeconomic risk. This chapter studies why U.S. stock market volatility has not changed much during the “great moderation” era of the 1980s in contrast to the prediction made by the standard C-CAPM. A new model is developed such that aggregate consumption is decomposed into stock and non-stock source of income so that stock dividends are a small part of consumption. This new model predicts that the great moderation of macroeconomic risk must have originated from declining volatility of shocks to the relatively large non-stock factor of production while shocks to the relatively small stock assets have been persistently volatile during the moderation era. Furthermore, the model shows that the systematic risk of holding equity is positively associated with the stock share of total wealth.

Committee:

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

Keywords:

Skew Student t distribution; GARCH-skew-t; volatility clustering; fat tails; skewness; stock returns; realized volatility; mixture-of-distributions; equity premium; asset return puzzles; consumption-based asset pricing; parameter uncertainty; Normal Inver

Wang, YuanfangAlternative measures of volatility in agricultural futures markets
Doctor of Philosophy, The Ohio State University, 2005, Agricultural, Environmental and Development Economics
The three essays of this thesis focus on modeling and forecasting agricultural futures market volatility utilizing two nonparametric volatility measures, realized volatility and range-based volatility. Special attention is given to comparing the performance of time series models used previously in the literature with these two measures. The first essay investigates the properties of realized volatility in the soybean futures market. The results indicate that the distributional properties of realized volatility based on 5-minute returns largely correspond with existing literature. The findings of three volatility measures confirm that the Mixture-of-Distributions-Hypothesis (MDH) is valid. In contrast, the standardized daily returns display some different properties compared with stock and exchange rate data. Moreover, the parametric ARFIMA and GARCH models reflect same patterns as described in nonparametric analysis. The second essay compares the performance of GARCH models, range-based GARCH models, and log-range based simple regression models in terms of their forecasting abilities. Realized volatility is used as the forecasting evaluation criterion. In-sample fitting results reveal that range-based GARCH models outperform standard GARCH models. Out-of-sample tests indicate that GARCH models extended with daily ranges work better than the log-range based ARMA models. The third essay examines the economic value of realized volatility in the context of hedging. Specifically, it provides an analysis of incorporating information contained in intraday prices into multivariate GARCH models and evaluates the statistical performance of the augmented GARCH models. Then, effectiveness of different optimal hedge ratios depending on different estimation procedures is compared by examining the in-sample and out-of-sample performance of the ratios. Results reveal that the use of the augmented GARCH models, while statistically appropriate, provides only marginal gains to the hedger.

Committee:

Matthew Roberts (Advisor)

Keywords:

GARCH; VOLATILITY; hedge ratios; GARCH models; hedge; realized volatility; hedging

Romero-Aguilar, Randall StaceEssays on the World Food Crisis: A Quantitative Economics Assessment of Policy Options
Doctor of Philosophy, The Ohio State University, 2015, Agricultural, Environmental and Developmental Economics
During the Global Food Price Crisis of 2007-2011, millions of people suffered hunger because food had become too expensive. To cope with this problem, the governments of several countries implemented policies to decouple the food prices in their domestic markets from prices in the international market or, at least, to provide assistance to the most vulnerable. Two of the most usual tools employed by governments trying to control prices were the restriction of food exports and the establishment and operation of food reserves, both of them seeking to increase the domestic supply of food in times of crisis. The three essays in this dissertation investigate the potential benefits and shortcoming of these policies. I start by considering the role of food policies themselves as causes of food price volatility. In the first essay, I examine several drivers of the Global Food Price Crisis, including: i) low grain stock levels, ii) trade restrictions imposed by wheat exporters, and iii) diversion of corn production to biofuel. To quantify their effects on grain prices, I develop a stochastic spatial-temporal equilibrium model of global wheat and corn markets, featuring six interdependent markets, random yields, endogenous acreage, speculative storage, and government policies on trade and stockpiling. I find that wheat export bans and increased wheat stockpiling explain significant rises in wheat prices and modest increases in corn prices in the short-run, but that the effects of these policies on wheat and corn prices are negligible in the long run. In the long run, sustained increases in wheat and corn prices are best explained by surging demand for biofuels, through its effect on permanently diverting acreage from wheat to corn. I then turn attention to whether food reserves are an effective tool to cope with price volatility. In the second essay, I develop a model to evaluate the optimal grain storage policy for a poor grain-importing country. Households are heterogeneous in their income endowment, and those who cannot afford enough food suffer from hunger. The international price of grain follows a Markov process with two states (tranquil periods and food crises), and households are unable to self-insure against changes in this price. The objective of the reserve operation is to reduce hunger rates. The model captures the trade-off in implementing the policy: raising a stock to prevent hunger tomorrow requires resources that could be used to reduce hunger today. Parameters are calibrated to reflect food supply and demand in Haiti. My results suggest that rather than storing food, a better approach for a poor country is to focus on fighting poverty directly, since the modest social protection provided by a storage policy could also be obtained through relatively small improvements in income per capita and income distribution. Currently, countries in Africa and in Asia are implementing regional multi-country food reserves to jointly combat the threat of volatile food markets. One question that arises is whether such agreements are stable, given the possibility of default. In the last essay, I address this question and evaluate how the stability of a joint reserve differs under two alternative organizational forms: a joint reserve operated as a credit union or operated as an insurance union. I analyze a joint food reserve in which two countries commit a fraction of their available food to a communal pool that may be used in case of emergencies in one or both countries. The agreement is vulnerable to default by one or the other country, subject to a penalty. For the resulting game, I look for a Nash-Markov perfect equilibrium to investigate the viability of the agreement. I find that the regional reserve is more sustainable when production shocks are positively correlated, although risk sharing is more effective when the correlation is negative. I also find that an “insurance” game can be more sustainable than a “credit” game.

Committee:

Mario J. Miranda (Advisor); Claudio Gonzalez-Vega (Committee Member); Abdoul Sam (Committee Member)

Subjects:

Agricultural Economics; Economics

Keywords:

food storage; price volatility; food security; hunger

Zhang, FangEssays on Rational Inattention and Business Cycles
Doctor of Philosophy, The Ohio State University, 2012, Economics

Rational inattention is an imperfect information mechanism that captures the fact that people are constrained in their ability to process information, and asserts that the imperfect ability to process information is the ultimate reason for imperfect learning. It features the optimal allocation of the scarce attention resource and the endogenous nature of information. My research focuses on the theoretical implications and empirical relevance of rational inattention for price dynamics in an environment with volatility uncertainty, and the implications on monetary policy.

The first chapter, "Rational Inattention in Uncertain Business Cycles," explores the impact of uncertainty shocks on price dynamics when there are information frictions resulting from limited information processing capability. The model shows that changes in shock volatility translate into changes in firms' response in levels through the endogenous role of information. Firms optimally adjust their information choice when a volatility shock occurs, and their pricing behavior changes accordingly. The paper proposes endogenous information choice as another channel through which volatility uncertainty affects economic activity. According to the model, 1) firms' learning and optimal attention exhibits inertia and asymmetry in response to volatility changes; 2) firms choose to process more information when uncertainty increases, especially about aggregate conditions; 3) responses to shocks are more sensitive as firms rationally choose to increase their information processing capability when perceived volatility increases. The paper sheds light on such issues as why monetary policy has time-dependent effects, whether and when to make policy changes and public announcements, and why economic agents' sentiments, the so-called "animal spirits," have real effects.

The chapter also provides empirical support for my model by using regime-dependent factor-augmented vector autoregression (FAVAR) analysis. I use FAVAR to decompose the fluctuations of sectoral price series into aggregate and sector-specific components, and explore their statistical properties and dynamics under different economic regimes. The results suggest: 1) sectoral prices exhibit higher aggregate volatility and lower persistence during recessions than during expansions; 2) sectoral price responses to aggregate shocks are more front-loaded during recessions; 3) there is a significant positive correlation between volatility and responsiveness to macro and micro level shocks, which suggests that attentiveness and responsiveness are positively related as predicted by the theoretical model. The results are robust to alternative economic regime indicators and multiple responsiveness measures.

The second chapter "Monetary Policy for Rational Inattentive Economies with Staggered Price Setting," examines the optimal monetary policy when firms are constrained by their information processing capability for frequent price adjustments. Firms' optimal information processing follows the rational inattention framework as in Sims (2003), which features an endogenous nature of information learning and contingency on the economic regime. Staggered price setting introduces the observed price stickiness and additional policy tradeoffs. The integrated model implies an optimal policy that commits to complete price stabilization in response to natural rate shocks but not in response to markup shocks. In the presence of markup shocks, the central bank faces tradeoffs among conflicting goals caused by information dispersion and nominal frictions.

Committee:

Paul Evans (Advisor); William Dupor (Committee Member); Pok-Sang Lam (Committee Member)

Subjects:

Economics

Keywords:

Rational Inattention; Stochastic Uncertainty; Time-varying Volatility; FAVAR; Business Cycles; Staggered Pricing; Monetary Policy

Zhou, YuTwo Essays on American Housing Markets: the Determinants of Housing Value Volatility and the Ownership Decision of Manufactured Housing
Doctor of Philosophy, The Ohio State University, 2009, Economics

My dissertation research aims to fill two gaps in the literature on empirical economics of housing.

In chapter 1, I use two blocks of American Housing Survey (AHS) national data to test four hypotheses about the determinants of housing value volatility, and reach consistent empirical findings using both AHS samples. While there are a number of studies of housing price volatility at the aggregate level, there are few studies of the determinants of the volatility of individual houses’ values. My findings show: 1) House values at both ends of the quality distribution are more volatile than those at the center. 2) House values in predominantly black areas are more volatile than those in white areas. 3) The more atypical a house is, the larger the volatility of house value. 4) The more highly land leveraged a house is, the larger the volatility of house value. In addition, there exists significant difference of housing value volatility among states.

In chapter 2, I study potential factors that prompt households to choose owning a manufactured home over owning a traditional home or renting. The AHS 1985-2003 national sample is applied to a nested logit model. Explanatory variables include both attributes of housing choices and characteristics of households. We found that: 1) Housing user cost significantly negatively affects housing choice. 2) Households with previous experience of living in manufactured homes are more likely to be manufactured home owners. 3) Households of low and medium-income, relatively young, and small sizes are more likely to own manufactured homes. 4) Married and white people more likely become homeowners of both manufactured and traditional homes than single and black people.

Committee:

Donald Haurin (Advisor); Stephen Cosslett (Committee Member); Lucia Dunn (Committee Member)

Subjects:

Economics

Keywords:

Housing Price Volatility; Ownership Decision; Manufactured Housing

Lee, AhrangEssays on Financial Frictions and Financial Integration
Doctor of Philosophy, The Ohio State University, 2012, Economics
This dissertation addresses two questions regarding international financial market integration and financial frictions. Does stock market volatility in a country raise that in other countries? To answer this question, I conduct two types of empirical exercises. I fit a simple bivariate vector augoregressions (VAR), which show a persistent positive response of domestic volatility to a shock in external volatility. In addition, I run two stage least squares on domestic volatility to resolve the problem of an endogenous explanatory variable. Disaster shocks are used as the instrument for external volatility. I find that international spillovers do occur in stock markets. In particular, one standard deviation increase in external volatility raises domestic volatility by at least 0.3 standard deviations. Moreover, I show that disaster shocks are a valid and robust instrument for volatility. To the best of my awareness, this is the first work addressing the issue of endogeneity in international stock markets with instrument variables. The second question asks if fixed costs to using financial intermediation are quantitatively important in explaining income differences across-countries. I introduce fixed costs into an entrepreneurship model with financial frictions where agents are heterogeneous in their financial assets, entrepreneurial ability and labor productivity. I find that the fraction of agents using financial intermediation substantially decreases as fixed costs increase. Fixed costs as low as 11 per cent of typical year's income lower the intermediated population from almost one to one fifth. Fixed costs also reduce accumulation of capital by 20 per cent as they restrict the intermediated population. Lastly, barriers to financial intermediation play an important role in increasing wealth inequality within an economy and across economies. The aforementioned fixed costs raise the wealth Gini index from 0.78 to 0.92 and reduce aggregate income by 10 per cent. That is, the fixed costs alone can explain 10 per cent of income difference between, for example, Belgium and Guyana.

Committee:

Paul Evans (Advisor); William Dupor (Committee Member); Lam Pok-sang (Committee Member)

Subjects:

Economics

Keywords:

financial frictions;fixed costs;volatility spillover;disasters shock

Kassa, HaimanotThree Essays in Finance
PhD, University of Cincinnati, 2013, Business: Business Administration
This dissertation consists of three loosely related essays. In Essay I, I study the relationship between firm specific risk and return. In Essay II, I study the managerial and investor short-termism. And in Essay III, I study investors heterogeneous preference for skewness and its effect on the idiosyncratic volatility puzzle. Essay I: A spurious positive relation between EGARCH estimates of expected month t idiosyncratic volatility and month t stock returns arises when the month t return is included in estimation of model parameters. We illustrate via simulations that this look-ahead bias is problematic for empirically observed degrees of stock return skewness and typical monthly return time series lengths. Moreover, the empirical idiosyncratic risk-return relation becomes negligible when expected month t idiosyncratic volatility is estimated using returns only up to month t - 1. Essay II: The paper considers a model in which (1) managers allocate effort to both short and long-term projects, and (2) there is feedback between the managerial incentive contract and the number of speculators collecting information on each type of project. More weight placed on near-term price results in more speculation based on information about the short-term project, which induces further increases in the weight placed on near-term price. This feedback effect can result in short-term speculation crowding out the collection of long-term information, which in turn results in the withdrawal of incentives aimed at inducing effort in more profitable long-term projects. The paper shows that the equilibrium that obtains depends upon adjustment costs and initial conditions and is, in general, not efficient. Such outcomes are consistent with concerns about managerial and investor short-termism recently expressed by policy makers and market participants (e.g., the Aspen Institute). The paper considers the efficacy of various corporate and public policy remedies. Essay III: Consistent with models that incorporate investors heterogeneous preference for skewness, I show that (1) high skewness stocks are primarily held by investors with the strongest affinity for lottery-like payoff, (2) the negative skewness-return relation is the strongest for those stocks primarily held by agents with the strongest affinity for lottery-like payoff, (3) the idiosyncratic volatility-return relation is the strongest for those stocks held by agents with the strongest affinity for lottery-like payoff, and (4) investors heterogeneous preference for skewness help explain the idiosyncratic volatility puzzle. Taken together, the results provide evidence for the importance of investors heterogeneous preference for skewness in asset pricing and its implication on the idiosyncratic volatility puzzle.

Committee:

Steve Slezak, Ph.D. (Committee Chair); Michael Ferguson, Ph.D. (Committee Member); Hui Guo, Ph.D. (Committee Member); Yan Yu, Ph.D. (Committee Member)

Subjects:

Business Administration

Keywords:

Idiosyncratic Volatility;CEO short-termism;Investor Short-termism;Heterogeneous Preference for Skewness;

Zhao, BoOverview of Financial Risk Assessment
BS, Kent State University, 2014, College of Arts and Sciences / Department of Mathematical Science
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

Keywords:

financial risk assessment; risk assessment methodologies; Capital Asset Pricing Model; Value at Risk; Volatility; risk free rate; financial risk;

Chen, Andrew YEssays on Asset Pricing in Production Economies
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 firms have high cash flow growth according to a number of definitions of cash flow. High cash flow growth means that value firms' cash flows are distributed toward the future, and, as a result, their prices are more exposed to discount rate shocks that drive the external habit model. The value premium is compensation for this high exposure. Chapter 3 examines general restrictions on production technologies implied by asset prices. It shows that representative firm models which are consistent with asset price data require either large capital adjustment costs, or volatile investment-specific technology shocks. These restrictions hold regardless of preferences, beliefs, operating leverage, or the completeness of asset markets. The restrictions summarize the sense in which asset prices are anomalous with respect to the theory of optimal investment.

Committee:

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

Subjects:

Finance

Keywords:

Asset Pricing, Macroeconomics, Equity Premium Puzzle, Volatility Puzzle, Value Premium

Nguyen, QuynhGiao N.High Temperature Volatility and Oxidation Measurements of Titanium and Silicon Containing Ceramic Materials
Doctor of Philosophy in Clinical-Bioanalytical Chemistry, Cleveland State University, 2008, College of Science
Titanium (Ti) and silicon (Si) containing materials are of high interest to the aerospace industry due to its high temperature capability, strength, and light weight. A continuous exterior oxide layer is desirable to reduce the oxidation rate of these two materials. At high temperatures, water vapor plays a key role in the volatility of materials including oxide surfaces. This study first evaluated several hot-pressed Ti and Si-containing compositions at high temperatures as a function of oxidation resistance. This study also evaluated cold pressed titanium dioxide (TiO2) powder pellets at a temperature range of 1400°C - 1200°C in water containing environments to determine the volatile hydoxyl species using the transpiration method. The water content ranged from 0-76 mole % and the oxygen content range was 0-100 mole % during the 20-250 hour exposure times. Results indicate that oxygen is not a key contributor at these temperatures and a volatile Ti-O-H species has been identified.

Committee:

Lily M. Ng, PhD (Committee Chair); James L. Smialek, PhD (Advisor); Kang N. Lee, PhD (Committee Member); John F. Turner II, PhD (Committee Member); Mary V. Zeller, PhD (Committee Member)

Subjects:

Aerospace Materials; Chemistry; Materials Science

Keywords:

aerospace; ceramic; combustion environment; high temperature; hydroxyl species; oxidation; materials; Si; silicon; titanium dioxide; TiO2; Ti-O-H; transpiration method; transpiration technique; volatility; water vapor

Chen, HuaizhiEstimating Stochastic Volatility Using Particle Filters
Master of Sciences, Case Western Reserve University, 2009, Applied Mathematics
The value of financial derivatives such as options depends, among other things, on the volatility of the underlying asset. Estimating volatility from historic data on asset returns with respect to models of stochastic volatility is inherently difficult due to the fact that volatility states cannot be directly measured. In order to investigate a solution to this problem, we use a sequential method based on particle filters to infer historic volatility from simulated data for a specific discrete approximation of the Hull-White model on stochastic volatility.

Committee:

Daniela Calvetti, PhD (Advisor); Erkki Somersalo, PhD (Committee Member); Kotelenez Peter, PhD (Committee Member)

Subjects:

Finance; Mathematics

Keywords:

Stochastic Volatility; Particle Filters

Omeike, Stanley Ikenedum-DikeSTRATEGY AS CONFIGURATION: STRATEGY STRUCTURE, MICRO FOUNDATIONS OF CAPABILITY CONFIGURATIONS AND THEIR EFFECTS ON EXECUTION GAPS UNDER VOLATILITY
Doctor of Philosophy, Case Western Reserve University, 2017, Management
Effective strategy execution depends on the organization’s capacity to understand the dynamics around strategy execution and to shape its strategy. The body of knowledge around strategy formulation is well established, but there is less clarity as to how organizations are to implement strategy to close the execution gap between their intent and reality. Although literature suggests that most successful organizations adapt significantly their strategy during implementation and ultimately realize a different strategy, we find that understanding the role of dynamic strategy process, which connects the firm’s strategic intent with the observed velocity of change and competitiveness within the environment is crucial but less understood. This calls for firm level dynamic capabilities and ambidextrous strategy implementation. Yet most studies of dynamic strategy processes focus less on connecting the interactions between volatility and strategy with the theory of dynamic capabilities to explain how this dynamic is expressed in the implemented strategy. Research largely ignores three important considerations: 1) how volatility and related variations in strategy jointly influence the effectiveness at closing the gap between strategic intent and implementation. 2) the mechanisms through which these factors interact and 3) how such interactions are expressed in the implemented strategy in relation to dynamic capabilities. We pose three related research questions: 1) how does volatility influence the configurations (molar structure) of the implemented strategy? 2) how does volatility affect the strength of each strategy orientation (operational, core expanding, core transforming) in the implemented strategy (Strategy variation)? and 3) to what extent does the presence of each of the strategy orientations mediate the effects of volatility on reducing strategy execution gaps? We study these questions using a sample of 557 companies in the US and Nigeria operating in several industries. We approach organization’s strategy and capability as recursively organized and influenced by environmental volatility. We study specifically environmental factors that constitute the volatility construct and relationships between these environmental constructs and organizational responses as strategy compositions and the related capability configurations. We show that under volatility, variations in strategy and related configurations of capabilities can have a positive relationship with strategic impact and increase implementation effectiveness. The study surfaces variations in the strategy orientations and how they explain the extent to which the organization engages in each capability component. We further uncover patterns of strategic practices with a view to conceptualize how gap reduction happens and what mechanisms influence it. For example, we observe a direct positive effect between volatility and strategy orientations; increasing levels of volatility leads to increased levels of discontinuous change in strategy in that the presence of regenerative change (core leapfrogging strategy) becomes stronger. Surprisingly, we find limited support for a direct negative effect of volatility on the gap reduction. Overall, implemented strategy has a molar structure, which varies to the extent to which organizations engage in each orientation of strategy when volatility changes. This research has several implications: first, it introduces a concept strategy configurations and their variations during strategy implementation; second, it directs executive’s attention towards salient mechanisms that influence the interactions between volatility and strategy structure and how these interactions connect to dynamic capabilities to influence implementation success. Finally, the study invites students of strategy to new research avenues to explore impactful interactions within volatile strategy contexts.

Committee:

Kalle Lyytinen, Ph.D. (Committee Chair); Simon Peck, Ph.D. (Committee Member); Bernard Bailey, Ph.D. (Committee Member); Robin Gustafsson, Ph.D. (Committee Member)

Subjects:

Business Administration; Entrepreneurship; Management; Organization Theory; Organizational Behavior

Keywords:

Strategy, Strategy implementation, Strategy Execution, Dynamic Capabilities, Strategy Execution Gap, Capability Configuration, Volatility, Strategy Context, Capability Orders

Gempesaw, David ConradDoes Idiosyncratic Volatility Proxy for a Missing Risk Factor? Evidence from Using Portfolios as Test Assets
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

Keywords:

idiosyncratic risk; idiosyncratic volatility; IVOL; IVOL puzzle; missing risk factor; systematic risk; risk premium; portfolio diversification; portfolios; exchange traded funds; ETFs; asset pricing; CAPM; Fama-French; Fama-MacBeth; financial economics;

Hanson, Thomas AlanReal Effects of High Frequency Trading
PHD, Kent State University, 2014, College of Business Administration / Department of Finance
High frequency trading (HFT) has revolutionized the functioning of modern equity markets, with high-speed algorithms now constituting the majority trading volume. To date, the academic literature has focused on the microstructural effects of these changes, among them changes in liquidity, volatility, and market fragmentation. This dissertation shifts the focus to the effects that HFT can have on decisions made within firms and their subsequent valuation by the market. Specifically, I explore HFT's effects on three corporate finance variables: the quality of corporate governance, the value of the firm, and the value of cash held on the balance sheet. In all cases, the effect of HFT is detrimental to firms. Corporate governance becomes less democratic, firm value declines, and the market gives a lower value to cash on the balance sheet. Previous work has established links between market activity and decisions made at firms. Two channels have been theorized based on information aggregation and liquidity. Therefore, I also explore four possible mechanisms through which HFT could conceivably affect corporate finance: liquidity, volatility, blockholders, and corporate governance. Each of these mechanisms is significant in some cases, reinforcing the reflexive and interconnected nature of markets, corporate governance, and firm value. The overall results suggest the existence of negative externalities from HFT activity. Such effects should factor into the ongoing debate on regulation and market structure. Future research ideas are also suggested to continue exploring the relationship between market microstructure and corporate finance.

Committee:

Jayaram Muthuswamy (Advisor)

Subjects:

Finance

Keywords:

High frequency trading; real effects; agency theory; volatility; microstructure

Joseph, CharlesMultiscale modeling and analysis of option markets
Doctor of Philosophy, Case Western Reserve University, 2014, Applied Mathematics
The fundamental question addressed in this thesis is: How does the mood of the traders affect a derivative markets? In lack of a reliable ground truth, a modeling-based approach is taken. First, we develop an agent based model that simulates the behavior of traders, characterized by few parameters that we associate to the mood. The effects related to different distributions of investors is observed via the time series of implied volatility surfaces of an option. To extract information out of the volatility surfaces, it has been found to be useful to reduce the dimensionality of the data. Typical model reduction involves low-rank approximation techniques, such as Principal Component analysis (PCA) or Nonnegative Matrix Factorization (NMF) algorithms. Principal component analysis and nonnegative matrix factorization has been successful in identifying market characteristics of different moods.

Committee:

Erkki Somersalo, Dr. (Advisor); Daniela Calvetti, Dr. (Advisor); Cyrus Taylor, Dr. (Committee Member); Wojbor Woyczynski, Dr. (Committee Member)

Subjects:

Finance; Mathematics

Keywords:

Implied Volatility

Wu, TingEssays on the Term Structure of Interest Rates and Long Run Variance of Stock Returns
Doctor of Philosophy, The Ohio State University, 2010, Economics

My dissertation contains three chapters.

In Chapter 1, I propose a term structure model based on risk-sensitive preferences. Following Hansen and Sargent (2008), I model a risk-sensitive consumer who shows aversion to uncertainties, and evaluates his utility using the max-min utility function. He considers three types of uncertainties: (a) uncertainty of future states; (b) uncertainty about current states; and (c) uncertainty about the model generating the data. I use a parameter to represent his aversion to the each uncertainty. The max-min utility function implies multiplicative adjustments to the standard pricing kernel.

The pricing kernel is combined with the exogenous processes of consumption growth and inflation to price the bond yields. I specify two bivariate long run risk models to represent the model uncertainty. The two models share a common specification of consumption growth, but the inflation process differs: in one model inflation is non-stationary, while in the other it is stationary. The risk-sensitive consumer behaves as if he assigns a higher probability to the model with lower utility, which is the model with non-stationary inflation. As the probability estimates are tilted toward the model with non-stationary inflation, both the short rate and yield spread increase. This explains the high short rate and yield spread in the 1980's. More generally, I show that the model fits the observed shape of the yield curve, volatility of long yields, predictability of excess bond returns and correlation between yields of different maturities.

In Chapter 2, I consider the predictability of excess bond returns. Recent research has shown that a forecasting factor based on the forward rates has significant predictive power for excess bond returns at all maturities. In this chapter, I investigate the macroeconomic factors underlying those forward rates. I specify a rich stochastic general equilibrium model and use the Bayesian method to extract key macro variables such as habit, the government spending shock, the technology shock, the inflation target and the monetary policy shock. I then relate them to the forecasting factor and show that the forecasting factor is mostly capturing the effect of technology shock. Following the literature, I construct a forecasting factor based on a linear combination of extracted macro variables. This new factor predicts both excess bond returns and equity returns better than the forecasting factor based on forward rates.

In Chapter 3, I reinvestigate the long run variance of stock returns following Pastor and Stambaugh (2009), who find that stock returns are riskier in the long run. As in Pastor and Stambaugh (2009), I use a Bayesian approach to assess the risk. I find that their conclusion is likely to be sensitive to the prior of the correlation between innovation in expected returns and unexpected returns. The correlation plays a key role in determining the riskiness of stock returns in the long run through the mean reverting component. My analysis suggests that their result depends critically on a prior that is sufficiently uninformative. If the prior of a highly negative correlation is sufficiently informative, the result would be overturned. I also find that their conclusion is robust to the addition of dividend growth into the predictive system. By estimating the correlation with a sharp prior distribution, I show that the posterior draws are sufficiently negative to generate a variance ratio smaller than 1 for 30 year stock returns.

Committee:

Pok-sang Lam (Advisor); Paul Evans (Committee Member); Huston McCulloch (Committee Member)

Keywords:

Term Structure of Interest Rates; Bayesian Learning; Risk Sensitive Preference; Long Run Volatility of Stocks

Shao, RenyuanThe Design and Evaluation of Price Risk Management Strategies in the U.S. Hog Industry
Doctor of Philosophy, The Ohio State University, 2003, Agricultural Economics and Rural Sociology
During recent years, more U.S. hog producers and meat packers are involved in marketing contracts to enhance net revenue and to limit downside price risk. This research explores new ways to efficiently price a subset of these contracts, window contracts, and to evaluate the effectiveness of these contracts to help producers and packers enter contracts that more effectively satisfy their preferences. A Monte Carlo simulation model in which thousands of paths for hog, corn and soybean meal prices are simulated is developed. These commodity prices are assumed following a random walk with drift. Futures prices are used to calibrate the means of the expected joint distribution of these three spot prices. To calibrate volatility of prices, the forecasting power of several frequently used volatility forecasting methods are examined; implied volatility is used to forecast volatility for near term and historical volatility is used for longer term horizons. Historical correlation is introduced to capture the co-movement of the three price series. Alternative basis forecasting approaches are also compared. The futures spread model performs best for short-term while a five-year historical average is best for long-term forecasting. The window contracts are decomposed into a portfolio of long Asian-Basket put and short Asian-Basket call options. A projected breakeven price is used to determine the floor price, and then the Monte Carlo simulation method is applied to price both a moving and a fixed window contract. These methods provide unbiased pricing of fixed and moving window contracts of one-year duration. A moving window contract may be preferred by contract issuers who value volatility reduction and due to cumulative performance issues. This same Monte Carlo method is also used to forecast net revenue for hog producers. Based on this forecasting model and the assumption of a mean-variance utility function, the prospective evaluation, which utilizes the Monte Carlo simulation methods described above, is compared with retrospective evaluation, which uses only past performance of the risk management strategy, for a net revenue and a utility maximizing producer. Prospective evaluation is marginally better than retrospective evaluation in terms of net revenue enhancement and risk reduction.

Committee:

Brian Roe (Advisor)

Keywords:

HOG; contracts; window contracts; PRICE; net revenue; volatility; forecasting

Amberger, KorieSectoral Reallocation and Information Economics
Doctor of Philosophy, The Ohio State University, 2015, Economics
In my first chapter, I note that cyclical U.S. labor markets have seen a reduction in fluctuations since the Great Moderation. Concurrent with this event, I show evidence of reduced cross-sector labor mobility. I quantify the impact of sectoral reallocation in shaping labor market volatility by developing a Diamond-Mortensen-Pissarides model. Calibrated to pre-1984 data, the model lets me ask how much of the Great Moderation is explained by a rise in reallocation frictions. Fluctuations in all labor market variables fall following the change. The benchmark two-sector model also generates higher labor market volatility, nearer the data, when compared to the predictions of a single-sector version. When one sector faces a negative shock, it sees not only a drop in expected match value but also expected outside value falls only marginally as more workers consider reallocation. These effects combine to produce larger declines in expected surplus, boosting the separation rate and lowering the job-finding rate. Increased barriers to reallocation weaken these additional sources of volatility. What causes economic fluctuations? A growing literature considers noise shocks, shocks affecting only expectations. Most research in the area has adopted a framework without capital. In my second chapter, I explore the implications of this omission. Incorporating endogenous capital accumulation in a New Keynesian model, I find it reduces the impact of noise shocks, halving the initial output response. When a noise shock hits, investment responds weakly and output is mostly driven by consumption. Usable capital on impact is fixed, so diminishing returns restrain the initial response in labor and output. Subsequent adjustments to the capital stock are gradual in equilibrium, leaving the overall output response muted relative to the labor-only noise shock models. Are sunspots, information uncorrelated with economic fundamentals, an important source of volatility? Experimental evidence suggests that individuals respond to sunspots, but sunspots are largely the only source of information. My last chapter examines what leads people to use sunspots when they have access to fundamental information. Subjects want to operate in the true (fundamental) state, but achieve lower payoffs for coordination. Fundamental information is provided by a private, imperfect signal. Subjects also see a sunspot in the form of a random public signal and are given no instruction on how to use the information. I find that individuals are more likely to converge on using the sunspot when fundamental information is noisy. When the information set is expanded to include a static and dynamic sunspot signal, convergence is weaker, but focused on the volatile, dynamic option. Together, my results suggest the pull of sunspots is stronger in times of high fundamental uncertainty, and can be responsible for the rise in economic volatility typically associated with these periods.

Committee:

Julia Thomas (Advisor); Aubhik Khan (Committee Member); James Peck (Committee Member)

Subjects:

Economics

Keywords:

sectoral reallocation; labor markets; volatility; search and matching; sunspots

Koh , Woo HwaEssays on the Cross-section of Returns
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 anomalies in the long sample.

Committee:

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

Subjects:

Finance

Keywords:

Asset pricing, Investment-based asset pricing model, uncertainty shocks, value premium puzzle, idiosyncratic volatility puzzle

Bittencourt, Mauricio Vaz LoboThe impacts of trade liberalization and macroeconomic instability on the Brazilian economy
Doctor of Philosophy, The Ohio State University, 2004, Agricultural, Environmental and Development Economics
After the creation of the Mercosur (Argentina, Brazil, Paraguay and Uruguay), in the beginning of the 1990s, new free trade agreements began to be debated between Mercosur and other countries. Traditional trade theory predicts that trade liberalization reallocates resources according to comparative advantage, reduces waste, and lowers the price of imported goods in a more transparent economic regime, with less lobbying activities, and exports not only grow rapidly, but also become more diversified. Most economists also share that open countries fare better in the long run than do closed ones, but the short run impacts from trade liberalization can harm the poor. Since Brazil is one of the countries with larger inequality in the distribution of income, with high levels of poverty and regional differences, this study takes these concerns seriously by assessing the economic impacts of a reduction in import tariffs on poverty and distribution of income, identifying a combined policy that can reduce possible negative impacts from trade reform on the poor, through a single-country multi-regional computable general equilibrium model (CGE) applied to Brazil. The main findings show that poverty and regional income inequality can be reduced through combined trade and tax policies. In recent years, countries like Argentina and Brazil have experienced many different economic crises due to their own domestic instabilities, which have contributed to delayed market opening in these countries, and have threatened the evolution of new trade agreements. This study also emphasizes the lack of macroeconomic policy coordination between Mercosur and the Free Trade Area of Americas (FTAA) countries, notably the exchange rate policy through the impact of real bilateral exchange rate volatility on trade. Therefore, a sectoral gravity model is estimated to evaluate not only the role played by the lack of macroeconomic policy coordination, but also to better evaluate the patterns of trade in the Mercosur and in the proposed FTAA. The overall results show that the reduction in the level of exchange rate volatility can increase bilateral trade, and gradual reduction in the level of tariffs and increase in countries’ income are also important pro-trade variables.

Committee:

Donald Larson (Advisor)

Subjects:

Economics, Agricultural

Keywords:

exchange rate; tariffs; import tariffs; TRADE; Mercosur; reduction in import tariffs; volatility

Ding, LiangInformation Diffusion across Financial Markets
PHD, Kent State University, 2010, College of Business Administration / Department of Finance
Financial markets demonstrate a large degree of comovement. Such comovement is important for a variety of investment and risk management decisions. This research is motivated by 2007-2008 financial turmoil. During the turmoil period, the markets co-move locally and globally, making it difficult for investors to hedge the risk. Although the cross market linkage is a topic of ongoing interest to researchers and practitioners, it seems that we are still in the preliminary stage to fully understand the cross market linkages, and even far away to prevent the crisis transmitting across markets. This dissertation attempts to answer two main questions, what are the major channels that link financial markets, and how those channels change in different periods. In this study, we examine two empirical tests on domestic markets and international markets linkage respectively. The first test focuses on the financial markets within U.S, and treats the stock, bond, CDS, stock option markets as a closely connected network. From 2004-2009, our tests find no evidence that static cross-market linkage becomes stronger in the crisis period than in the normal period. In terms of dynamic linkage, we find the information flow pattern become stronger in the crisis period. And we identify the role of volatility and liquidity in the financial network. The second test focuses on the international markets linkage using the derivatives market information. We use a family of volatility indexes from 1999-2009, including VIX, VSTOXX, VDAXNEW, VXJ, and VSMI, to filter the information diffusion through other channels. Therefore, the tests contribute a unique perspective to find out how the investors expect the interaction of the near-term volatility across U.S. and international markets. Our tests provide evidence that the linkages across corresponding markets are stable in the past decade. And we also find U.S. market plays a stronger role in a two way information flow structure with other markets through volatility linkage. The dissertation contributes a comprehensive research on the financial network linkage. The results obtained in this dissertation will improve our understanding of information diffusion process across financial markets and are expected to fill significant gaps in the current literature.

Committee:

Paul Dawson (Committee Co-Chair); Michael Hu (Committee Co-Chair); Xiaoling Pu (Committee Member)

Subjects:

Finance

Keywords:

Market Linkage; Financial Crisis; CDX; Contagion; Volatility; Liquidity; VIX Index; Network

Hemantha, Maddumage Don PrasadFINANCIAL MARKET MODELING WITH MINORITY AND MAJORITY RULES
Master of Science (MS), Bowling Green State University, 2006, Physics
Two multi-agent models are proposed and the characteristics of each model is measured through numerical simulation. Agents in both models use the same two strategies. First model is based on the minority rule and an exponential return distribution was observed, while majority rule based second model generates a power law decay of probability. These models are capable of reproducing every stylized fact of financial markets: autocorrelation of return and absolute return, log-normal volatility distribution, leverage effect, and multifractal properties.

Committee:

Haowen Xi (Advisor)

Subjects:

Physics, Condensed Matter

Keywords:

volatility; ¿¿¿¿¿¿nancial; 1E-3; autocorrelation; MARKET; effect

YANG, JR-MING JIMMYA MARKET STABILIZATION MECHANISM - CIRCUIT BREAKER: THEORY AND EVIDENCE
PhD, University of Cincinnati, 2003, Business Administration : Finance
The term "circuit breaker" originates in electrical engineering to describe a pre-set switch that shuts down electrical activity in excess of a system's design capacity. Since late 1988, the New York Stock Exchange has been imposing circuit breaker systems, which mandate trading halts for a stipulated period of time if the Dow Jones Industrial Average moves by more than a certain amount compared to the previous day's close. Besides the U.S., many countries in the world have also imposed circuit breaker systems in an attempt to reduce market volatility. The purpose of this dissertation is to examine the effectiveness of circuit breaker systems in financial markets. In the first chapter, I conduct a thorough review of the literature on circuit breaker systems and provide suggestions for future studies on this issue. The review covers theoretical background, empirical evidence from both stock markets and futures markets, and the related research methodology. The results of an in-depth analysis of current circuit breaker systems in the world are presented in this chapter. There are two different types of circuit breakers: trading halts and price limits. My second chapter is designed to test the performance of price limits empirically using initial public offering (IPO) data. I compare IPOs with their industry-and-size matched seasoned equities to test three hypothesis raised by price-limit opponents. My results represent the performance of price limits for IPOs and can be used to predict the performance of price limits during periods with high information asymmetry. The most popular rationale for imposing price limits is to reduce market overreaction and volatility. To date, the empirical literature does not give a clear answer on whether price limits reduce or induce overreaction. Therefore, I examine trade-to-trade data in an effort to provide insight to the ongoing debate over the relation between price limits and overreaction in chapter three. I test two hypotheses to investigate whether price limits reduce or induce overreaction. Overall, I conclude that price limits induce overreaction when the price is approaching the limit, but they also reduce overreaction when prices hit the limit consecutively.

Committee:

Dr. Yong H. Kim (Advisor)

Subjects:

Economics, Finance

Keywords:

circuit breakers; price limits; volatility; trading activiity; price discovery

Ryu, YulPrimary commodity and its derivatives: Volatility relationships and market efficiency
Doctor of Philosophy, Case Western Reserve University, 1993, Economics
While there are numerous previous studies that have characterized volatility behavior, the majority have focused on the behavior of individual asset volatility, principally stock volatility, whereas the relationship between volatilities has been virtually ignored. This dissertation examines the relationship between volatilities, particularly volatilities of a primary commodity and its derivative commodities. This study finds that volatilities of a primary commodity (crude oil) and its derivative commodities (heating oil and unleaded gasoline) are significantly positively correlated. It also finds that the relationship between volatilities is quite stable: there is a strong tendency to restore the volatility relationship when the relationship is violated. The dissertation also examines the time-variations of volatilities of the energy commodities. The contemporaneous volatility relationship between a primary commodity and its derivative, together with other information variables such as lags of volatility changes, the basis change, and the interest rate volatility change, are used to predict volatility changes of each commodity. The hypothesis that volatility follows a random walk process is rejected. For heating oil and unleaded gasoline, the direction of the one-day ahead out-of-sample volatility changes is correctly pred icted in over 65% of the cases. These hit ratios are significantly higher than 50% which is the expected hit ratio when volatility changes are not predictable. Based on the seemingly powerful predictability of volatility changes, this dissertation examines the efficiency of the market for options on energy commodity futures. Results show that abnormal risk-adjusted profits after transaction costs are taken into account cannot be earned consistently by trading energy options on the basis of the one day ahead out-of-sample volatility change. While the volatility changes are precisely predicted in a statistical sense, the magnitude of the daily volatility changes are not large enough to allow abnormal profit opportunities when the relatively large bid-ask spreads are considered. These results indicate that the energy options market is allocationally efficient.

Committee:

Peter Ritchken (Advisor)

Subjects:

Economics, Finance

Keywords:

Primary commodity derivatives Volatility relationships market efficiency