Equity market risk, credit risk and real investment risk

Chapter one of my Ph.D. thesis focuses on equity investment risk and how it relates to equity market non-participation.; The model produces equity market non-participation in an economy with uninsurable labor income risk and heterogeneous skill levels. Prudence and impatience generate stationary household wealth levels that depend on income. Labor income heterogeneity leads to wealth heterogeneity. A HARA class utility with subsistence consumption requirement generates decreasing RRA with respect to household wealth. In addition low skill households have less human capital and therefore have lower diversification demand for stocks. Low wealth, high RRA and low diversification demand predicts that low skill households do not hold stocks in the face of a moderate ownership cost.; Chapter two of my thesis focuses on credit risk and how it relates to default bond pricing.; We price corporate debt from a structural model of firm default. We assume that the capital market brings about efficient firm default when the continuation value of the firm falls below the value it would have after bankruptcy restructuring. This characterization of default makes the model more tractable and parsimonious than existing structural models. The term structures of yield spreads and durations predicted by our model are consistent with the empirical literature.; Chapter three of my thesis focuses on real investment risk and how it applies to investments in R&D.; We develop a real options model of R&D valuation, which takes into account the uncertainty in the quality of the research output, the time and cost to completion, and the market demand for the output. The model is then applied to study the problem of pharmaceutical under-investment in R&D to treat diseases affecting the developing regions of the world. To address this issue, world organizations and private foundations are willing to sponsor vaccine R&D, but there is no consensus on how to administer the sponsorship effectively. Different research incentive contracts are examined using our valuation model. Their effectiveness is measured. We find that, in general, purchase commitment plans (pull subsidies) are more effective than cost subsidy plans (push subsidies), while extending patent protection is completely ineffective.