Essays in asset pricing and portfolio choice

Shibanov, Oleg (2011) Essays in asset pricing and portfolio choice. Doctoral thesis, University of London: London Business School.

Abstract

This thesis is devoted to studying portfolio choice and cross-section of returns in three different frameworks. In the first chapter I study the impact of a global cap-and-trade system for green- house gas emissions on financial markets. Firms face shrinking caps on their emissions and can reduce these emissions by installing a cleaner technology. Two main results are obtained. First, producers that have lower emissions at the start-up date have consistently higher expected returns on equity. Second, the higher the fraction of free permits and the reduction in the emissions after installment of the cleaner technology, the lower the spread between returns. I obtain preliminary empirical results that support the implications of the model. In the second chapter I study the relation between fees and performance in the U.S. mutual fund industry. I show that not only risk-adjusted before-fee return (alpha) but also its volatility (sigma) have significant impact on fees and fund flows. Three novel results are obtained. First, the level of fees is positively related to both alpha and sigma. Second, the change in fees is positively related to sigma before 2000 yet negatively after 2000, and is negatively related to alpha. The latter result may seem counterintuitive, and I further show that increase in fees is followed by improved performance. Finally, fund flows depend positively on sigma. I rationalize these results in a simple model. In the third chapter I study optimal labor, consumption, training and portfolio decisions in a life-cycle model with human capital and wealth accumulation. The agent can increase his future earnings by augmenting the human capital through training and learning-by-doing. It is shown that the levels of wage income and the shape of wealth can be matched to the data, while the share of risky asset in the portfolio exhibits an inverse U-shaped form.