Three essays in finance

This thesis consists of three essays on asset pricing. Chapter 1 presents an equilibrium model to study the convergence trading of large hedge funds in segmented markets. The model provides an alternative explanation for the anomaly of a price gap between two fundamentally identical securities. Strategic arbitrageurs, taking into account their price impact, do not close the price gap. This gap makes investors who trade with the strategic arbitrageur less willing to invest in risky assets ex ante. Thus, the gap brings an additional source of risk, anticipation risk. The model predicts that the future price gap is wide when the current trading volume is high. Daily data for Royal Dutch and Shell provides evidence in support of the model. Chapter 2 (coauthored with Joon Chae and Andrew W. Lo) is about stock price behavior. We perform various statistical analyses on stock market returns as Fama (1965) did, using CRSP index returns from 1926-2005. We investigate stock return distributions and report return characteristics. First, stock returns do not follow a normal distribution, though many studies assume this.

Department dc:contributor.department

Sloan School of Management.

Grantor dc:publisher

Massachusetts Institute of Technology

Year dc:date.issued

2006

Author dc:creator

• He, Li, 1977-

Advisor dc:contributor.advisor

• Andrew W. Lo.

• Sloan School of Management.

Statement dc:rights

• M.I.T. theses are protected by copyright. They may be viewed from this source for any purpose, but reproduction or distribution in any format is prohibited without written permission. See provided URL for inquiries about permission.

Licence dc:rights.uri

• http://dspace.mit.edu/handle/1721.1/7582

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/1721.1/37111

OAI identifier oai:identifier

oai:dspace.mit.edu:1721.1/37111