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Author: Jaroslav Horvath Publisher: ISBN: Category : Languages : en Pages : 132
Book Description
This dissertation analyzes business cycles and international asset pricing under disaster risk. In the first chapter, I use annual consumption and financial data for 31 countries over 140 years and I document that developing countries exhibit a more volatile consumption and a significantly larger equity premium. By employing a Bayesian Markov Chain Monte Carlo approach, I estimate an empirical model of macroeconomic disasters - low-probability events with disastrous consequences such as the Great Depression - in developing and high-income countries. I find that developing countries have a higher overall probability of entering a disaster and that they are also much more likely to enter an individual disaster such as a sovereign debt crisis. Disasters in high-income countries are shown to be shorter, on average, but more severe and uncertain. Group heterogeneity in disaster parameters allows me to generate a substantial equity premium for both groups of countries. Disaster contagion plays a vital role in explaining the equity premium puzzle for high-income countries. The model-simulated correlations of equity premium within each group of countries are qualitatively in line with data. The second chapter provides evidence that the U.S. stock market returns not only exhibit large negative skewness, but that they also provide poor payoffs during deep consumption recessions. Using out-of-the-money S&P 500 index options, I obtain a hedged risk premium and show that the hedged risk premium captures the equity risk premium during normal times. I isolate the disaster risk premium as the difference between the total equity risk premium and the hedged risk premium. In addition, I illustrate that the risk premium due to disasters explains about eighty percent of the total equity risk premium. In the cross-section of stock returns, I find that stocks that are more negatively related to the disaster risk premium yield considerably higher subsequent returns. However, this finding is not robust to adjusting for Fama-French price factors. I also find a little predictive power of the disaster risk premium with respect to the aggregate stock market returns due to the lack of autocorrelation in the disaster risk premium. The third chapter recognizes the importance of a large informal economy for business cycles in emerging countries. I show that a two-sector real business cycle model of a small open economy with a poorly measured informal sector, Cobb-Douglas utility function, and country spread fluctuations accounts for the low volatility of hours worked and large relative volatility of consumption to output in emerging countries. Due to the non-separability between consumption and labor supply, the model cannot explain the countercyclical real interest rates and trade balance that prevail in developing countries. The results suggest that GHH preferences are necessary to generate countercyclical real interest rates and trade balance in a neoclassical setting with working capital constraint and exogenous movements in real interest rates.
Author: Jaroslav Horvath Publisher: ISBN: Category : Languages : en Pages : 132
Book Description
This dissertation analyzes business cycles and international asset pricing under disaster risk. In the first chapter, I use annual consumption and financial data for 31 countries over 140 years and I document that developing countries exhibit a more volatile consumption and a significantly larger equity premium. By employing a Bayesian Markov Chain Monte Carlo approach, I estimate an empirical model of macroeconomic disasters - low-probability events with disastrous consequences such as the Great Depression - in developing and high-income countries. I find that developing countries have a higher overall probability of entering a disaster and that they are also much more likely to enter an individual disaster such as a sovereign debt crisis. Disasters in high-income countries are shown to be shorter, on average, but more severe and uncertain. Group heterogeneity in disaster parameters allows me to generate a substantial equity premium for both groups of countries. Disaster contagion plays a vital role in explaining the equity premium puzzle for high-income countries. The model-simulated correlations of equity premium within each group of countries are qualitatively in line with data. The second chapter provides evidence that the U.S. stock market returns not only exhibit large negative skewness, but that they also provide poor payoffs during deep consumption recessions. Using out-of-the-money S&P 500 index options, I obtain a hedged risk premium and show that the hedged risk premium captures the equity risk premium during normal times. I isolate the disaster risk premium as the difference between the total equity risk premium and the hedged risk premium. In addition, I illustrate that the risk premium due to disasters explains about eighty percent of the total equity risk premium. In the cross-section of stock returns, I find that stocks that are more negatively related to the disaster risk premium yield considerably higher subsequent returns. However, this finding is not robust to adjusting for Fama-French price factors. I also find a little predictive power of the disaster risk premium with respect to the aggregate stock market returns due to the lack of autocorrelation in the disaster risk premium. The third chapter recognizes the importance of a large informal economy for business cycles in emerging countries. I show that a two-sector real business cycle model of a small open economy with a poorly measured informal sector, Cobb-Douglas utility function, and country spread fluctuations accounts for the low volatility of hours worked and large relative volatility of consumption to output in emerging countries. Due to the non-separability between consumption and labor supply, the model cannot explain the countercyclical real interest rates and trade balance that prevail in developing countries. The results suggest that GHH preferences are necessary to generate countercyclical real interest rates and trade balance in a neoclassical setting with working capital constraint and exogenous movements in real interest rates.
Author: Amir Akbari Publisher: ISBN: Category : Languages : en Pages :
Book Description
"This thesis explores the role of borrowing frictions, exchange rate risk, and intertemporal demand in stock prices across international financial markets. Specifically, I study how global asset prices are governed, considering the constraints and incentives that investors face when making investment decisions. The first essay adds a new dimension to the research on the dynamics of global market integration, providing an explanation for reversals in market integration via funding illiquidity. I show that when funding capital dries out, investors, unable to borrow and trade freely, fail to facilitate the integration process. Therefore, international asset prices during these periods are explained more by country-specific asset pricing factors than by global asset pricing factors. The second essay explores the role of exchange rate risk and intertemporal demand in international markets. These sources of risk are linked via the interest rate channel and are both likely proxies of the state variables that affect asset prices over time. We carefully disentangle the two risk factors and study the international equity market indices with multiple risk factors in a large cross-section through time. We show that the evidence of global pricing of risk crucially hinges on pooling assets with substantial cross-sectional variation. The third essay introduces a methodological innovation to study the dynamics of the compensation for the intertemporal risk in business cycles. Specifically, we contribute to the empirical asset pricing literature by studying the relative importance of prices of intertemporal risk during recessions, recoveries, and expansions." --
Author: Byong-Ju Lee Publisher: Stanford University ISBN: Category : Languages : en Pages : 132
Book Description
This thesis consists of three essays on international finance. The first essay is "Exchange rates and Fundamentals". A new open interest rate parity condition that takes account of economic fundamentals is developed from stochastic discount factors (SDFs) of two countries. Through this parity condition, business cycles or fundamentals are linked to exchange rates. Key empirical findings from this parity condition are as follows. First, this model beats the random walk hypothesis: economic fundamentals explain exchange rate movements for high interest rate currencies. Exchange rates of low interest rate currencies act like a random walk because they are less correlated with fundamentals owing to their low risk. For example, U.S. business cycles explain the direction of changes in exchange rates against the dollar. The same thing is true for Japan. Second, this model resolves the forward premium puzzle: the forward premium puzzle is not a general characteristic as regarded in previous studies. It happens when the risk awareness of investors is low, during economic expansions and for low risk currencies. The second essay is "Carry Trade and Global Financial Instability". Carry trade, an opportunistic investment strategy that takes advantage of interest rate differential across countries, is identified the cause of the large-scale depreciations of peripheral currencies in the later half of 2008. A simultaneous equations model, which is derived from a conceptual partial equilibrium model for a local foreign exchange market, is estimated from a cross-sectional sample. The results suggest that the larger appreciation of the yen than the dollar was brought about by a lack of the local supply of the yen rather than a more severe crunch of yen credits. The third essay is "The Economic Origin of Letters of Credit". This essay discusses the economic origin of letters of credit, an instrument widely used in international trade. A game theoretical analysis shows that letters of credit improve efficiency in trade settlements, increasing returns in trade. A few notable facts on letters of credit are discussed. First, the new institution is adopted by merchant banks to maximize their profits and in the process, an improvement in efficiency of international transactions is obtained. Second, the organization established by the legacy institution, bills of exchange, played a critical role in adopting the new institution. Third, the legal enforcement is not essential in this economic institution. Finally, two drivers are identified that improve efficiency of transactions: concentration and projection.
Author: Thomas Yang Powers Publisher: ISBN: Category : Languages : en Pages :
Book Description
My first essay investigates the relationship between risk and return for investment projects within the firm. I focus on the film industry and find that more volatile movies have higher rates of return, even though this risk is entirely idiosyncratic. My second essay explains the high rates of return on commodity currencies in terms of the procyclicality of commodity prices. Commodity prices are procyclical because commodities are inputs, and thus demand for them is driven by the global business cycle. I also use labor market data to show that increases in labor costs during commodity booms contribute to the higher real exchange rates observed in commodity exporting countries. My final essay, co-authored with Jeffrey Frankel, studies optimal monetary policy in commodity-exporting economies facing a terms-of-trade shock. We build on the previous literature by introducing borrowing constraints, and find that currency depreciation during such a shock leads to higher welfare than either a fixed exchange rate or inflation targeting.
Author: Alan Picard Publisher: ISBN: Category : Languages : en Pages : 165
Book Description
Abstract This dissertation consists of three essays. My first paper re-examines the link between idiosyncratic risk and expected returns for a large sample of firms in both developed and emerging markets. Recent studies using Fama-French three factor models have shown a negative relationship between idiosyncratic volatility and expected returns for developed markets. This relationship has not been studied to date for emerging markets. This study relates the current-month’s idiosyncratic volatility to the subsequent month’s returns for a sample of both developed and emerging markets expanding benchmark factors by including both a momentum and a systematic liquidity risk component. My second essay contributes to the important literature on the topic of the small capitalization stocks historical outperformance over large capitalization stocks by investigating the hypothesis that the small firm premium is related to macroeconomic and financial variables and that relationship is driven by the economic cycle in the United States and Canada. More specifically, this study employs recent advances in nonlinear time series models to explore the relationship between the small firm premium, and financial and macroeconomic variables in the Canadian and U.S. economies. My third paper re-examines the findings of a recent research paper that suggested that market wide liquidity may act as a leading indicator to the economic cycle. Using several liquidity measures and various macroeconomic variables to proxy for the economic conditions, the paper presents evidence that stock market liquidity could forecast business cycles: A major decrease in the overall level of market liquidity could indicate weak economic growth in the subsequent months. However, the drawback in the analysis is that the relationship is investigated in a linear approach even though it has been proven that most macroeconomic variables follow non-linear dynamics. Employing similar liquidity measures and macroeconomic proxies, and two popular econometrics models that account for non-linear behavior, this study hence re-investigates the relationship between stock market liquidity and business cycles.
Author: Jaroslav Horvath
Author: Jaroslav Horvath
Author: Jai-Hyung Yoon
Author: Amir Akbari
Author: Byong-Ju Lee
Author: Thomas Yang Powers
Author: Sundaram Janakiramanan
Author: Pheng Lui Chng
Author: Alan Picard
Author: René Marcel Stulz
Author: James Anthony Bennett