Leelahaphan, Tim (2010) Essays on empirical macroeconomics and international financial markets. PhD thesis, University of Warwick.

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Abstract

The thesis consists of three chapters of self-contained empirical studies. In Chapter 1, we examine long-run and short-run dynamics of US real trade balance with Canada. In addition to the linear error-correction model, the Markov-switching error-correction model is employed, using quarterly data from 1985 to 2008. We find that real exchange rate, real oil price and real new housing price index have statistically significant effects on US real trade balance with Canada in the long run. We acquire evidence of short-run J-curve. Results show that short-run dynamic effects of real oil price are not so fearful, with statistically insignificant effect on real trade balance following an increase in real oil price. House prices could be argued as being strongly relevant for settlement and adjustment of US trade balance in the long run through the wealth effects. However, the immediate (next-quarter) effect of a change in housing wealth is insignificant, consistent with existing literature. US real trade balance with Canada forecasts from our non-linear VAR model outperform ones from the linear VAR in first difference (DVAR) model and ones from the random walk model. The long-term out-of-sample forecastability is not much improved by the oil price and house price variables, which, nonetheless, actively explain in-sample movement of US real trade balance with Canada in the long run. In Chapter 2, we examine the effect of monetary policy and exchange rate on stock price movements in Asia. We employ a Bayesian structural vector autoregression model and impose sign restrictions to identify simultaneously and uniquely contractionary monetary policy shocks and exchange rate depreciation shocks in an integrated framework. This study covers the stock markets of Thailand, Malaysia and South Korea, over the period 1989-2008. Our main results acquired using sign restrictions show that monetary policy shocks result in a strongly persistent effect on market index real stock prices whereas the impact of exchange rate shocks is short-lived over the short run. The variance decomposition suggests that the exchange rate is as important as monetary policy for explaining the dynamics of market and financial sector index real stock prices. More precisely, for all the countries examined, real exchange rate developments have been more important in the short run. In Chapter 3, within the context of a time-varying transition probabilities Markov-switching model of the uncovered interest parity (UIP) condition, we examine if variables measuring fear and volatility have an effect on the probability of switching between the regime where the UIP condition holds and the regime where it does not. The state transition probability depends nonlinearly upon the variables examined. These are the exchange rate volatility, the VIX equity option implied volatility index and the TED spread. Applying this to both US dollar exchange rates and cross (exchange) rates from January 4, 1990 to September 11, 2008, we find that those three variables increase the probability of remaining in the regime where the UIP condition holds. In addition, the probability of switching from the regime where the UIP condition does not hold to the regime where the exchange rate follows the UIP condition decreases as these variables measuring fear and volatility fall, especially the VIX equity option implied volatility index. The smoothed probabilities show that exchange rates examined essentially do not follow the UIP condition except during periods in which the fear and risk variables are increasing, as in the recent global financial crisis in particular.

Item Type:	Thesis or Dissertation (PhD)
Subjects:	H Social Sciences > HB Economic Theory
Library of Congress Subject Headings (LCSH):	Balance of trade -- United States, United States -- Commerce -- Canada, Canada -- Commerce -- United States, Stocks -- Prices -- Asia, Foreign exchange rates -- United States
Date:	February 2010
Institution:	University of Warwick
Theses Department:	Department of Economics
Thesis Type:	PhD
Publication Status:	Unpublished
Supervisor(s)/Advisor:	Clements, Michael P. ; Taylor, Mark P., 1958-
Sponsors:	University of Warwick. Dept. of Economics
Extent:	viii, 187 leaves : charts
Language:	eng
URI:	http://wrap.warwick.ac.uk/id/eprint/3754

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