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This thesis consists of three papers that make independendet contributions to the field of financial economics. As such, the papers, Chapter 2, Chapter 3, and Chapter 4, can be read independently of each other. In Chapter 2, we construct a simple measure of the aggregate illiquidity of hedge fund portfolios, and show that it has strong in- and out-of-sample forecasting power for 72 portfolios of international equities, U.S. corporate bonds, and currencies, over the 1994 to 2011 period. The forecasting ability of hedge fund illiquidity for asset returns is, in most cases, greater than, and provides independent information relative to, well-known predictive variables for each of these asset classes. We construct a simple equilibrium model to rationalise our findings and empirically verify auxiliary predictions of the model. In Chapter 3, I analyse the risk-shifting of hedge funds. Since the information on hedge fund holdings is very restricted, researchers have used the variance of returns as a proxy for risk. I propose a new method for measuring the time-varying variance. I use this method to investigate whether equity long-short hedge funds engage in risk-shifting driven by their past performance relative to their peers. I find that hedge funds which have strongly underperformed or outperformed their peers in recent months increase their exposure to the core strategy, i.e. the equity long-short strategy, and to non-core strategies. The risk shifting is mitigated for hedge funds with long redemption periods. Chapter 4 contributes to the equity premium prediction literature. I improve the forecast performance of typical single variable predictive regressions used in the equity premium prediction literature through Bayesian priors derived from consumption-based asset pricing models. To implement these model-based priors, I develop a Bayesian procedure which is rooted in the macroeconometrics literature. I find that the model-based priors can increase the explanatory power, measured by the out-of-sample R2, of the single variable predictive regressions by several percentage points.

The Chalk is an important aquifer representing 20% of all national water supplies in the United Kingdom (UK Groundwater Forum, 1998). Much of the aquifer is uncon¯ned and in places overlain by a deep unsaturated zone which may be 10's of metres thick. Understanding °ow and transport processes within the unsaturated zone is important as they dictate the fate and behaviour of groundwater contaminants and the quality of aquifer recharge. This thesis develops a uni¯ed physics-based modelling framework for unsaturated chalk that is consistent with observed (often apparently contradictory) phenomena at chalk sites. These include: a fast water table response to rainfall events (in days) and an absence of surface run-o® (Headworth, 1972); slow solute migration (in tens of years) with very little dispersion (Oakes et al., 1981); speci¯c yields that can vary by an order of magnitude during droughts (Price et al., 2000). Flow in unsaturated chalk is described using a modi¯ed Richards' equation for dual- permeability, whereby fast °ow occurs in fractures and much slower °ow occurs in the matrix. Hydraulic characterisation of the matrix is achieved using existing mercury intrusion data. The fractures are characterised by consideration of existing in situ hydraulic conductivity data. Hypothetical coupled transient °ow and solute transport simulations of the model are presented. A key ¯nding is that the system is highly non-linear causing di®erent temporal sampling rates of the precipitation time-series to yield very di®erent results. The simulations support the widely accepted hypothesis that peak preservation in observed solute pro¯les is an artefact of very little fracture °ow. The model further suggests that the Chalk unsaturated zone possesses signi¯cant storage properties (excluding the intergranular pores of the matrix) which attenuate in¯ltration to a rate which can be absorbed by the matrix and provide greater storage than that identi¯ed from conventional pumping test analyses.