Essays in international finance

Huang, Huichou (2015) Essays in international finance. PhD thesis, University of Glasgow.

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This Ph.D. thesis contains 3 essays in international finance with a focus on foreign exchange market from the perspectives of empirical asset pricing (Chapter 2 and Chapter 3), forecasting and market microstructure (Chapter 4).

In Chapter 2, I derive the position-unwinding likelihood indicator for currency carry trade portfolios in the option pricing model, and show that it represents the systematic crash risk associated with global liquidity imbalances and also is able to price the cross-section of global currency, sovereign bond, and equity portfolios; I also explore the currency option-implied sovereign default risk in Merton’s framework, and link the sovereign CDS-implied credit risk premia to currency excess returns that it prices the cross section of currency carry, momentum, and volatility risk premium portfolios.

In Chapter 3, I investigate the factor structure in currency market and identify three important properties of global currencies – overvalued (undervalued) currencies with respect to equilibrium exchange rates tend to be crash sensitive (insensitive) measured by copula lower tail dependence, relatively cheap (expensive) to hedge in terms of volatility risk premium, and exposed to high (low) speculative propensity gauged by skew risk premium. I further reveal that these three characteristics have rich asset pricing and asset allocation implications, e.g. striking crash-neutral and diversification benefits for portfolio optimization and risk management purposes.

In Chapter 4, I examine the term structure of exchange rate predictability by return decomposition, incorporate common latent factors across a range of investment horizons into the exchange rate dynamics with a broad set of predictors, and handle both parameter uncertainty and model uncertainty. I demonstrate the time-varying term-structural effect and model disagreement effect of exchange rate determinants and the projections of predictive information over the term structure, and utilize the time-variation in the probability weighting from dynamic model averaging to identify the scapegoat drivers of customer order flows. I further comprehensively evaluate both statistical and economic significance of the model allowing for a full spectrum of currency investment management, and find that the model generates substantial performance fees.

Item Type: Thesis (PhD)
Qualification Level: Doctoral
Additional Information: PhD Thesis Examiners: Professor Lucas Menkhoff and Professor Dimitris Korobilis; PhD Viva Outcome: Outright Pass (No Correction / A); Awarded Adam Smith Business School Prize for PhD Excellence.
Keywords: Carry trades, position-unwinding risk, sovereign CDS spreads, currency options, forward premium puzzle; exchange rate misalignments, copula, tail dependence, moment risk premia, currency investment management; exchange rate forecasting, currency risk premia, term structure factors, dynamic (Bayesian) model averaging, model disagreement, scapegoat variables, customer order flows.
Subjects: H Social Sciences > HA Statistics
H Social Sciences > HG Finance
Colleges/Schools: College of Social Sciences > Adam Smith Business School > Economics
Supervisor's Name: MacDonald, Professor Ronald and Cerrato, Professor Mario
Date of Award: 2015
Depositing User: Dr Huichou Huang
Unique ID: glathesis:2015-6952
Copyright: Copyright of this thesis is held by the author.
Date Deposited: 04 Mar 2016 09:20
Last Modified: 04 Mar 2016 09:26
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