Essays in Empirical Finance: Evaluating Risk in FinancialMarkets

Essays in Empirical Finance: Evaluating Risk in FinancialMarketsBy Alysa V. ShcherbakovaThis dissertation is comprised of two parts, each addressing animportant type of financial risk. The first part is composed of anessay discussing Market Risk. This essay examines a causalrelationship between the series of securities returns and tradedvolumes in high-frequency data. Linear and nonlinear Grangercausality tests are used to evaluate a causal relationship betweenthe series of volumes and returns of various investment vehicleswithin the parametric and the non-parametric frameworks, and fortrading and calendar time specifications.The second part contains two essays, each addressing a specificaspect of Firm Risk. The first essay focuses on estimating obligorcredit rating migration probabilities. Short- and long-runrelationships between asset quality and obligor ratings are modeledand quantified. The use of a continuous-record model addresses theproblems of data sparsity and control for resulting estimationerrors; while the implementation of a methodology allowing us toprecisely identify the stages of the business cycle enables us todetermine the incremental impact of idiosyncratic and systematicrisk factors on rating transitions probabilities, resulting in moreprecise estimates of credit rating migration trends.The second essay tests theoretical predictions about therelationship between leverage and firm performance set forth by thecorporate finance literature. The dynamic relationship between firmperformance and leverage is examined empirically using theDifference GMM method of econometric estimation. Multiple measuresof performance and leverage are utilized, controlling foridiosyncrasies associated with each particular definition andallowing us to generate inferences about the practical relationshipbetween firm performance and debt.