Three Essays on International Financial Market Linkages.
PhD thesis, National University of Ireland Maynooth.
This thesis investigates three cutting edge issues in empirical finance. The first, examined in Chapter 2, is an investigation of the hypothesis that macroeconomic uncertainty is a significant risk factor in explaining deviations from the uncovered interest parity (UIP) condition (or time-varying risk premium) using data from the G7 countries. To analyze the relationship between the risk premium and macroeconomic risk factors, we employ VAR-GARCH-in-mean models. The results show that the currency risk premium may be due to macroeconomic volatility.
The second issue (Chapter 3) concerns the causal linkages between monetary and financial market returns of the New Member States (NMS) with the euro zone following the introduction of the euro. To measure monetary convergence we employ UIP deviations and stock market integration is proxied by the differential of the risk-adjusted returns of the NMS countries versus a euro zone stock index. We look for a causal relationship between excess currency and excess stock market returns of the aforementioned countries. We employ Granger causality in mean and variance tests to assess this relationship. The main finding is that the excess currency return is a significant leading indicator of the excess stock market return, with stronger evidence of causality in the variance of the process.
Finally, the third issue (Chapter 4) examines the time-varying co-movements of equity returns within major sectors, for a number of developed and developing countries. In particular, we ask the question if the conditional return correlations have increased excessively by historical standards during the recent financial crisis. We utilize asymmetric multivariate GARCH models. The main finding is that correlations have increased over the recent period, but the levels of co-movements are not excessive by historical standards. There is little difference between the co-movements of financial and non-financial stocks across countries, implying that this shock is largely undiversifiable.
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