Four Essays on Capital Markets and Asset Allocation.

Summary Extreme events have a significant impact on return distributions and investment decisions. However, the role of event risks is underestimated in popular approaches to financial decision making. This thesis includes event risks in investment decisions to improve the overall optimality of investments. We examine event risks in two different but consistent financial settings: portfolio selection and corporate finance. In portfolio selection, we focus on incorporating higher-order information to capture the impact of event risks on portfolio construction. Higher-order extensions are implemented on two main portfolio optimization methods: the classical mean-variance optimization and CAPM framework, and the stochastic dominance approach. We find that the inclusion of higher order information improves the overall optimality of the portfolio given the presence of event risks. In one particular case, we combine traditional applications of mean-variance optimization and stochastic dominance analysis to examine the efficiency of the DJIA index. We find that DJIA is effective as a performance benchmark. In the area of corporate finance, we primarily identified M&A name changes among the S&P 500 Index and examined how name change events affect performance patterns for acquirers and targets. In this firm study, we show that name changes significantly affect return dynamics and that the abnormal return difference between name change events and no name change events is economically and statistically significant. Overall, our studies show that including event risks in decision-making processes provides significant benefits to asset allocation optimization.