Topics in asset pricing and risk management.

摘要

The first chapter explores the asset pricing impact of financial distress and idiosyncratic volatility on cross-sectional stock returns. I show that the puzzling negative correlation between idiosyncratic volatility and return is a manifestation of financial distress. Using daily and monthly return data from 1971 to 2006, I show that while the volatility spread is -1.68% for the most distressed stocks, it is actually positive and significant at 0.61% per month for the least distressed ones. This indicates that financial distress has a more fundamental impact on the cross-sectional returns than idiosyncratic volatility. Moreover, in a horse-race comparison under the Fama-MacBeth firm-level regression set up, financial distress takes away the explanatory power of idiosyncratic volatility on cross-sectional stock returns. Interaction of financial distress with other asset-pricing anomalies, including momentum and value effects, is also explored.;The second chapter examines returns post catastrophe-induced seasoned equity offerings (SEO) of property and casualty (PC) insurance companies traded in U.S. between 1981 and 2006. Probit analysis reveals that PC insurers who choose to conduct SEO post major catastrophes display different characteristics than the firms who choose not to. Insurers with CAT SEO tend to intriguingly either have higher leverage level or higher profitability. This is explained by the fact that the capital raised through SEO is used either to restore capital to survive the financial distress, or on the other end of the spectrum, to expand market share in the profitable hard market following catastrophes. Investors are found to be capable of distinguishing the motivations behind the decision of catastrophe induced SEO by analyzing firm characteristics as well as stock return performances during the waiting period.;The third chapter studies the usage of two common hedging tools, reinsurance and derivatives, by property and casualty insurance companies. In a simple mean-variance efficient optimization model, the two hedging tools display substitutive effect when asset and liability do not display strong natural hedging. This relationship is tested empirically using a six-year insurance company firm-level data on reinsurance usage and off-balance sheet derivative trading recorded between 2000 and 2005.