The purpose of this paper is to investigate the effect of the "limits of arbitrage" on securities mispricing. Specifically, I investigate the effect of the availability of substitutes and financial constraints on stock mispricing. In addition, this study investigates the difference in the limits of arbitrage, in the sense that it will lead to lower mispricing for these stocks, relative to non-S&P 500 stocks. I also examine if the lower mispricing can be attributed to their lower limits of arbitrage. Modern finance theory and efficient market hypothesis suggest that security prices, at equilibrium, should reflect their fundamental value. If the market price deviates from the intrinsic value, then a risk-free profit opportunity has emerged and arbitrageurs will eliminate mispricing and equilibrium is restored. This arbitrage process is characterized by large number of arbitrageurs which have infinite access to capital. However, a better description of reality is that there are few numbers of arbitrageurs to the extent that they are highly specialized; and they have limited access to capital. Under these condition arbitrage is no more a risk-free activity and can be limited by several factors such as arbitrage risk and transaction costs. Other factors that are discussed in the literature …

This dissertation consists of three essays: essay 1, Underwriting Use of Credit Information and Firm Performance ‐ An Empirical Study of Texas Property‐Liability Insurers, essay 2, Prediction of Ratings in Property‐Liability Industry when The Organizational Form Is Endogenous, and essay 3, A Discussion of Parsimonious Methods Predicting Insurance Companies Ratings. The purpose of the first essay is to investigate the influence of underwriting use of credit information on variation in insurers’ underwriting performance. Specifically, this study addresses the following two research questions: first, what firm‐level characteristics are associated with the insurers’ decision to use credit information in underwriting? second, is there a relationship between the use of credit information and variation in insurers’ underwriting performance? The empirical results indicate that larger insurance companies, companies having more business in personal auto insurance, and those with greater use of reinsurance are more likely to use credit information in underwriting. More importantly, the results indicate that use of credit information is associated with lower variation in underwriting performance, consistent with the hypothesis that use of credit information enables insurers to better predict their losses. The purpose of the second essay is to resolve the inconsistent relationship between the organizational forms (i.e., stock versus …

During the Great Recession of 2007 and 2008, liquidity and credit dried up, threatening the stability of financial institutions, particularly the banking firms. Traditional source of funds from the last resort, the Discount Window of the Federal Reserve System, failed to remedy the liquidity problem. To assuage the liquidity and credit problem, the Federal Reserve System established several emergency lending facilities and provided unprecedented amount of loans to the banking industry. Using a dataset published by Bloomberg LLP in the aftermaths of the financial crisis, which contains daily loan balances from the Fed, I conduct an event study to test whether financial markets are efficient in reflecting all public, anticipated and classified information in security prices. The most important contribution of this dissertation to the finance discipline and literature is the investigation and analysis of the Fed’s unprecedented loans to the banking industry during the Great Recession and the market reaction to it. The second major contribution of this study is the empirical test of strong form efficient market hypothesis, which has not been feasible due to legal data challenges. This dissertation has other contributions to the finance discipline and banking research. First, I develop an algorithm for measuring the …