Date of Award


Degree Type


Degree Name

Doctor of Philosophy


This thesis investigates the effects of beliefs in both a monetary and a financial setting. Specifically, the thesis studies the potential effects that price level fluctuations have on societal beliefs, the general medium of exchange, and economic welfare. In a finance setting, this thesis also studies how fluctuations in beliefs can explain the observed "hot issues" market phenomena in the initial public offering (IPO) equity market. The "hot issues" market phenomena refers to recurring periods in which the volume of IPOs and the magnitude of their first day returns are observed to be systematically larger than average.;Chapter 2 is a study that exposes the deficiency inherent in monetary models that ignore the medium of exchange function of money. The chapter starts out by reviewing some of the ideas put forward by early economic and social theorists, such as Carl Menger and Georg Simmel, on the origins and continued existence of money as a medium of exchange. Chapter 2 reviews the recently developed search models that formalize the idea that beliefs in an object's ability to act as a medium of exchange are a critical prerequisite for an object to circulate as a medium of exchange. However, in reviewing these search theoretic models of money, the study finds that this approach to modelling money would be an ideal framework in which to formalize the idea that price level fluctuations have a detrimental effect on beliefs and, in the end, on economic welfare.;Chapter 3 of this thesis presents an overview of the defining empirical characteristics of the IPO market as well as a review of some of the explanations put forward regarding the empirical anomalies associated with the pricing and the volume of IPOs. In reviewing the literature concerned with the IPO process, this chapter also shows that the "hot issues" market phenomena needs further study.;Chapter 4 empirically investigates various implications of the "windows of opportunity" explanation of the "hot issues" market phenomena. This informal explanation relies on a form of investor speculation. Specifically, it assumes that investors undergo periods (or regimes) in which they hold overoptimistic beliefs about the expected returns of firms in certain sectors or industries. Subsequently, the stocks in these sectors become overvalued. Companies take advantage of the overvaluation of stocks in their related sector and decide to go public during these periods of investor overenthusiasm. Thus, this explanation suggests that the observed cyclical fluctuations in IPO data may be better viewed as fluctuations arising from unobservable stochastic regime changes in investor sentiment.;In order to be able to test for the presence of recurring stochastic regime changes in the IPO data, a Markov switching technique for modelling time series processes subject to discrete state-dependent regime changes is used.;In the fifth chapter the firm's decision to go public is modelled using an optimal stopping model found in statistical decision theory. This model formalizes the "windows of opportunity" hypothesis of the "hot issues" market phenomena. This model predicts that IPOs will be clustered during certain periods. By allowing some degree of firm heterogeneity, as measured by the firms' public information content, this model also predicts that older, larger "information rich" firms are more likely to go public than "information poor" firms. (Abstract shortened by UMI.)



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