Essays in financial economics

Abstract

The first chapter offers the contribution of the thesis. The second chapter provides a brief review in the literature of dynamic interactions of durable goods markets and proposes a new model of dynamic interaction in price changes between leasing and selling markets for automobiles. Our framework assumes a differential game between multiple Bertrand-type competing firms which offer differentiated products to forward-looking agents. Empirical analysis of our model using monthly US data from 2002 to 2011 shows that variations in selling (cash) market prices lead rapidly dissipating changes of leasing market prices in the opposite direction. We discuss the practical implications of these results by augmenting a standard leasing valuation formula. The additional terms represent the leased asset value changes that can be expected on the basis of past variations in automobile selling market prices. The third chapter of the thesis investigates the determinants of public debt by employing tools of corporate finance. Analysis of 45 countries between 2000 and 2009 shows that: country size (-), corruption (+), democracy (-), probability of default (-), growth (-) and government revenues (+), account for 39.93% of the variation in the debt-GDP ratios. These factors proxy for: country size, discipline of debt, default costs, growth and government free cash flows. Accounting for unobserved heterogeneity we find random cross country effects. Cross country regressions of the averaged data explain the 37.59% of the debt variability. We also, propose two guiding rules for the government to decide its level of debt the trade-off theory rule, and the peer-group debt rule. We discuss the policy implications of our five factor model by finding the implied debt ratios for the countries of our sample. The world median debt ratio is 47.80% while our model implies 55.40%. Hungary strives to lower its debt to meet the Maastricht target while our model proposes the opposite. China by using 14.50% of its GDP less debt leaves 281 billion dollars on the table. United States use 4.1 trillion dollars, more debt than our model implies. The final chapter of this thesis discusses extensions and further directions of the dynamic interaction study and of the sovereign capital structure study.