Date of Award
Olin Business School
Doctor of Philosophy (PhD)
In Chapter 1, we generalize the concept of "systematic risk" to a broad class of risk measures potentially accounting for high distribution moments, downside risk, rare disasters, as well as other risk attributes. We offer two different approaches. First is an equilibrium framework generalizing the Capital Asset Pricing Model, two-fund separation, and the security market line. Second is an axiomatic approach resulting in a systematic risk measure as the unique solution to a risk allocation problem. Both approaches lead to similar results extending the traditional beta to capture multiple dimensions of risk. The results lend themselves naturally to empirical investigation.
For Chapter 2, note that substantial cross-sectional variation in entrepreneurial compensation has been documented in prior literature, although explanation is scarce. The uniqueness of small businesses, in particular the intrinsic difference between entrepreneurs and corporate managers, calls for additional insights aside from that on executive compensation. This study takes an asymmetric-information perspective, where a continuous-time game-theoretic model is developed, incorporating an interesting trade-off between current and future payoffs. A breakdown in the market of entrepreneurial ventures will not occur, but both separating and pooling equilibria are possible, and consequently an equilibrium is not necessarily informationally consistent. Furthermore, when an equilibrium is indeed revealing, the dissipativeness of the signal emitted by entrepreneurs is completely endogenous. These findings correspond naturally to empirical predictions about entrepreneurial pay, especially on the cross-industry differential in compensation structure.
In terms of Chapter 3, notice that life insurance often embeds a surrender option that gives the policy holder a right to exchange an existing contract for its cash surrender value. Similar to mortgage prepayment option that imposes a cash-flow risk to MBS investors, this surrender option is a source of concern for life insurers. While prior studies have attempted to quantify this surrender risk by pricing the surrender option, a common theoretical assumption imposed is fully rational response of policy holders to only interest rates. However, actual surrender experience indicates that interest rates are just one of the multiple factors that drive the surrender decision and policy holder response is not necessarily optimal. This research therefore integrates an empirical surrender function into the option pricing framework by employing a novel data set from a large life insurance industry experience study. It shows, for the first time in the literature, that policy vintages are a particularly significant and meaningful factor in addition to macroeconomic variables that impact surrender activity. Using these empirics, I find that the experience-based value of the surrender option is substantially less than its fully rational counterpart. In addition, the competitive landscape of the life insurance industry and the interest rate environment both play an important role in assessing the surrender risk exposure of life insurers.
Chair and Committee
Thomas Maurer, Todd T. Milbourn, John Nachbar
Liu, Suying, "Essays in Financial Economics" (2015). Arts & Sciences Electronic Theses and Dissertations. 416.