Cenedese, Gino (2011) Essays in international finance. PhD thesis, University of Warwick.

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Abstract

This thesis consists of three essays in international finance, with a focus on the foreign exchange market. The first chapter provides an empirical investigation of the predictive ability of average variance and average correlation on the return to carry trades. Using quantile regressions, we find that higher average variance is significantly related to large future carry trade losses, whereas lower average correlation is significantly related to large gains. This is consistent with the carry trade unwinding in times of high volatility and the good performance of the carry trade when asset correlations are low. Finally, a new version of the carry trade that conditions on average variance and average correlation generates considerable performance gains net of transaction costs. In the second chapter I study the evolution over time of the response of exchange rates to fundamental shocks. Using Bayesian time-varying-parameters VARs with stochastic volatility, I provide empirical evidence that the transmission of these shocks has changed over time. Specifically, currency excess returns tend to initially underreact to interest rate differential shocks for the whole sample considered, undershooting the level implied by uncovered interest rate parity and long-run purchasing power parity. In contrast, at longer horizons the previously documented evidence of overshooting tends to disappear in recent years in the case of the euro, the British pound and the Canadian dollar. Instead, overreaction at long horizons is a persistent feature of the excess returns on the Japanese yen and the Swiss franc throughout the whole sample. In the third chapter we provide a comprehensive review of models that are used by policymakers and international investors to assess exchange rate misalignments from their fair value. We survey the literature and illustrate a number of models by means of examples and by evaluating their strengths and weaknesses. We analyse the sensitivity of underlying balance (UB) models with respect to estimated trade elasticities. We also illustrate a fair value concept extensively used by financial markets practitioners but not previously formalised in the academic literature, and dub it the indirect fair value (IFV). As case studies, we analyse the models used by Goldman Sachs and by the International Monetary Fund’s Consultative Group on Exchange Rate Issues (CGER).

Item Type:	Thesis or Dissertation (PhD)
Subjects:	H Social Sciences > HG Finance
Library of Congress Subject Headings (LCSH):	Foreign exchange market, Carry trades (Foreign exchange), Foreign exchange rates
Date:	September 2011
Institution:	University of Warwick
Theses Department:	Warwick Business School
Thesis Type:	PhD
Publication Status:	Unpublished
Supervisor(s)/Advisor:	Sarno, Lucio ; Tsiaks, Ilias
Sponsors:	Warwick Business School
Extent:	ix, 175 leaves : charts
Language:	eng
URI:	http://wrap.warwick.ac.uk/id/eprint/49399

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