Three Essays in Financial Economics

Qianying Zhang, Florida International University


The dissertation consists of three papers in Financial Economics. The first paper revisits the link between interest rates and corporate bond credit spreads by applying Rigobon’s (2003) heteroskedasticity identification methodology. This novel approach allows us to account for endogeneity problems and to conclude that credit spreads respond negatively to interest rates, a result consistent with the implications of Merton’s (1974) structural model. The negative relation is robust to macroeconomic shocks, interest rates characteristics, different volatility regimes, and bond ratings. To explain the negative relation, we rule out the plausibility of callability and business cycle as origins of the negative relationship. The second paper investigates the assumption that financial asset prices including stocks and bonds, reflect intrinsic value. The commercial real estate market’s long-term use of both judgment (appraisal) based returns and transaction returns provides a test of the role of intrinsic value. Statistically significant results from cointegrating models suggest that transaction based returns deviate from judgment based returns in the short run, but converge back to the equilibrium state. Additional tests show that the cointegrating residuals among transaction, appraisal and REITs returns predict the next period transaction returns. The transaction or price returns are predictable with convergence to intrinsic value. The market moves to intrinsic value. The third paper decomposes the stock price into fundamental permanent, fundamental transitory, and non-fundamental shocks in order to explore the determinants of stock price fluctuations. The signal extraction model can incorporate the investor’s signal extraction process, which allows us to estimate the parameters of cash flow news and discount rate news and decompose stock price more accurately. The results show that the fundamental permanent shock and non-fundamental shock each contribute half to the fluctuation of stock prices while the fundamental transitory shock almost does not play a role in stock price fluctuations. Also, using the measure of time varying risk, we further decompose the non-fundamental component into time varying risk and noise and find that 30% of non-fundamental shock can be explained by the time varying risk shock.

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Recommended Citation

Zhang, Qianying, "Three Essays in Financial Economics" (2017). ProQuest ETD Collection for FIU. AAI10846870.