his dissertation addresses questions of investment theories in financial economics. Chapter 1 studies investment problem with ambiguity and agency friction in a optimal contracting framework, where investors (principal) have ambiguous beliefs about the cash flows and the managers (agent) can pursue unobservable risk-taking strategies that earn cash flow but may destroy capital. Model ambiguity affect investment and risk taking decisions only when there is agency friction that makes it costly to motivate agent. With agency frictions, more ambiguity-averse investors implement less investment but more risk taking strategies. This happens because these investors write contracts with high-powered incentives to transfer cash flow ambiguity to the agent but such high incentives encourage risk-taking strategies that give agent more short-term rewards. Pay-performance sensitivity is shown to increase when investors are more ambiguity averse or when project size is larger, the model can thus help explain why managers in small firms and in firms whose business nature is complex receive compensations packages that are more equity like.\\Chapter 2 investigates investment strategies under threat of long term disability risk for a consumer who needs to maintain a living standard that is at least a certain fraction of the historically highest level (HHL). There exists an optimal wealth-to-HHL threshold ratio above which the investor increases consumption beyond the HHL. The long-term disability risk significantly reduces consumption and investment. The inability to borrow against future income magnifies the impact of long term disability and further decreases consumption and investment. Our model generates hump shaped lifecycle consumption and investment patterns before retirement that are consistent with empirical evidence and shows the importance of the access to long term disability insurance. The traditional financial advice that one should invest less as one ages is only partially correct.\\ Chapter 3 studies optimal investment problem with stochastic fund inflow in a continuous-time setting, where the fund flow can be non-smooth and unobservable. In addition to security return risk, fund manager faces flow risk as assets suddenly flow in/out. Close-form solution shows that fund manager holds a portfolio that hedges against fund flow risk in addition to standard Merton portfolio allocation and the hedging intensity is significantly increased by more frequent fund in/out flows. Investment strategies and welfare level are largely affected by fund flow smoothness, observability, and market closure.

Creator

• Liu, Yufeng

DOI

• https://doi.org/10.21985/n2-thrg-n904

Subject

• Finance

Language

• en

Alternate Identifier

• http://dissertations.umi.com/northwestern:15560
• etdadmin_upload_818233

Date created

• 2021-01-01

Resource type

• Dissertation

Rights statement

• In Copyright