Doctor of Philosophy (PhD)


Department of Finance

Document Type



An efficient and well-functioning financial market is one where prices reflect all available information. In inefficient markets securities are mispriced and resources are systematically misallocated, which would be costly for all citizens. Testing the efficient market hypothesis (EMH) has been a focus of empirical asset pricing studies. Based on one view, prices should not be consistently predicted in an efficient market. The EMH is rejected if prices are predicted by available information. Another view is that making consistent profit is impossible in an efficient market even for skilled investors. The EMH is rejected if evidence of consistent profit is found among professional traders such as analysts or mutual fund managers. This study tests the EMH from both perspectives. First, by investigating the predictability of stock returns by available information from options and short-sale market. Second, by exploring the performance of mutual fund managers in corporate bond market.

In Chapter 1, we employ the implied volatility spread (IVS) and the short lending fee as measures of private information conveyed by their respective markets. Using credit rating announcements as an informational event, we find that both IVS and the short fee have significantly higher predictive power for returns on event days versus non-event days. Both IVS and the short fee also predict the direction and magnitude of credit rating changes. Options order imbalance (OIB) does not explain the results. In models with both explanatory variables, the short fee remains significant in all specifications, while IVS loses explanatory power.

In Chapter 2, we examine a sample of corporate bond mutual funds to explore the impact of size on performance. Results show that on average, fund performance decreases by 29.08 basis points per year when the fund size increases by one standard deviation. Several researchers suggest that the negative effect of scale on performance is related to illiquidity effects. Finally, given the adverse effect of size on performance, we quantify the fund manager’s skill. Our results indicate that corporate bond mutual fund managers are skilled. On average, these managers make consistent profit of 4 million dollars per year due to their skill.



Committee Chair

Mo, Haitao



Available for download on Monday, March 19, 2029