Econometric models

This thesis investigates the direction of causality as well as short-run dynamics and long-run equilibrium relationship between stock prices and exchange rates using quarterly data for the period 1960:1--2004:4. The studies apply techniques of the unit root, cointegration and Standard Granger causality tests to examine the relationship between these two financial variables. The empirical results reveal that there is no causal linkage and no cointegration between the stock prices and exchange rates as suggested under Traditional and Portfolio approaches. The results support the view that the semi-strong form of EMH holds true for the U.S. financial markets.

Essay I: Governance surrounding dividend initiation. According to the free cash flow hypothesis, managers prefer to invest surplus cash, even in value reducing projects, rather than release it to shareholders. Yet, previous studies of dividend payout conclude that managers pay more in dividends when they are entrenched, supporting the substitute model... The results indicate that initiating firms have stronger shareholder rights, in contrast with much of the prior research on continuous divident payout. Firms with lower entrenchment index are more likely to initiate dividends... Essay II: Earnings management surrounding dividend initiation. Prior research tests earnings management surrounding changes in dividend payout and researchers conclude that the earnings management is a means of amplifying the dividend signal to the market. However, dividend initiation is a unique event. If initiation represents signaling, similar to a dividend increase, then management will manage earnings upward. If, on the other hand, divident initiation is better explained by the free cash flow hypothesis, then initiation may be entered into with caution or reluctance by management.

The main objective of this thesis is to simulate, evaluate and discuss three standard methodologies of calculating Value-at-Risk (VaR) : Historical simulation, the Variance-covariance method and Monte Carlo simulations. Historical simulation is the most common nonparametric method. The Variance-covariance and Monte Carlo simulations are widely used parametric methods. This thesis defines the three aforementioned VaR methodologies, and uses each to calculate 1-day VaR for a hypothetical portfolio through MATLAB simulations. The evaluation of the results shows that historical simulation yields the most reliable 1-day VaR for the hypothetical portfolio under extreme market conditions. Finally, this paper concludes with a suggestion for further studies : a heavy-tail distribution should be used in order to imporve the accuracy of the results for the two parametric methods used in this study.

The Market Timing - Buy and Hold (MT-BH) is introduced, tested against widely accepted performance models of market timing and tested if implamentation is possible. The MT-BH metric measures the condition of engaging in market timing strategies relative to buy and hold investing across an equity market. The metric provides an alternative explanation to why market timing results of investors and managers vary through time and across different equity markets. This dissertation examines how the is correlated with traditional market timing measures of the Treynor and Sharpe ratios over the 1995-2010 time period and how it affects widely used measures of regression based market timing models of Treynor- Mazuy and Henriksson-Merton. The Market Timing - Buy and Hold (MT-BH) metric can be applied to any equity market over any time period to condition the market timing skill of money managers in any equity market around the world. The final accomplishment of this dissertation is to determine if readily available finance and macro-economic variables can help investors determine which years are more favorable to pursue market timing strategies and which years favor buy and hold investing. When real GDP growth rates, inflation rates and PE ratios were low or negative and when dividend yields were high, market timing strategies were favorable across 44 country market indexes from 1994-2008. These results were robust to country level of development, negative market return years and other control variables. The conditions for pursing market timing strategies were time variant and detectable with macro-economic and finance variables. The MT-BH metric allows investors and brokers to determine when to switch from buy and hold investing to a market timing strategy using macro-economic and financial variables and helps to explain why market timing skill of managers is rarely found to be persistent.

Entrepreneurship occupies a curious place in economic theory. On one hand, the importance of entrepreneurship is widely recognized, particularly as it pertains to economic growth. However, the entrepreneur lacks a broadly accepted economic theory, and suffers from a dearth of literature on the subject. We believe that this is due to economics' heavy reliance on linear mathematical theory. In this thesis, we use nonlinear mathematics to construct a model of the entrepreneur that captures the sudden destabilization of a steady state, the unpredictability of a creative action, the possibility of entrepreneurial failure, and sensitivity to small changes in environment.