Three essays in financial economics (Russia)

The first essay provides direct evidence on the risk aversion of participants in a securities market. It uses the prices of the Imperial Russian Government lottery bonds issued in 1864 and 1866 to estimate the time-variation in investor risk aversion. Time variation in investor risk aversion is then compared to the dynamics of the Russian bond market over the period 1889 to 1904. Increases in risk aversion are positively associated with increases in the price of a risk-free asset. This result is in accord with economic intuition that higher risk aversion is associated with higher demand for a safe asset and hence higher equilibrium price of a risk-free security, and a lower risk-free rate. Implications of Consumption CAPM for a relationship between changes in interest rates and changes and levels of risk aversion are tested. Evidence supporting the model is found. The essay provides evidence on the role of risk aversion in securities market dynamics.; The second essay studies the effects of financial innovation in a model with incomplete financial markets, heterogeneous agents with stochastic endowment income, and endogenous stock market participation. To participate in the market for risky assets investors must incur a fixed cost. It is shown that an agent's decision to participate is related to the agent's generalized Sharpe ratio, a measure of attractiveness of investment opportunities to the investor. The ratio takes into account the covariance of asset payoffs with the agents' endowment risk. It is shown that financial innovation may change asset prices by affecting the set of participants and demand for the risky asset. Endogenous financial innovation is discussed.; The third essay examines governance explanations for the discount of preferred shares to common shares in the Russian market. Conflicts between shareholder classes may help explain the discount. However, for this to be the sole explanation the estimated models suggest that the magnitude of future adverse shareholder events would have to be very high. Nevertheless, evidence of a common factor potentially related to governance seems evident in the data, implying that corporate control issues may be partially responsible for the observed preferred share discount.