Asset pricing and financial market regulation

Clare, Andrew David (1992) Asset pricing and financial market regulation. University of Southampton, Doctoral Thesis.

Abstract

The objective of this dissertation is to improve our understanding of the relationship between the macroeconomic environment and asset prices. In Part 1 of the thesis attention is focussed upon so called financial market anomalies and upon the links between the equity markets of Germany, Japan, the UK and the USA and their respective macroeconomies. The key results are:- 1) each market displays seasonality in varying degrees; 2) there exists in each economy a small, stable set of economic variables which are able to predict stock market returns over a number of years; and 3) that the Fisher hypothesis does not hold for any of the four markets. In Part 2 using UK data and the formal framework of the APT, it is shown that there exists a number of macroeconomic variables which have associated risk premia. Some of the variables which were found to have predictive power for equity returns in Part 1 are found to be an integral part of the asset pricing relationship in Part 2. The results from parts 1 and 2 are then used in Part 3 to develop two complete, risk based models of a securities house. The derived measures of the probability of firm failure were both found to be sensitive to balance sheet change when simulation experiments were conducted and therefore may offer regulators an important framework for the design of regulations for these firms.

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