Essays in international finance
Cenedese, Gino (2011) Essays in international finance. PhD thesis, University of Warwick.
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Official URL: http://webcat.warwick.ac.uk:80/record=b2581269~S1
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|
|Official Date:||September 2011|
|Institution:||University of Warwick|
|Theses Department:||Warwick Business School|
|Supervisor(s)/Advisor:||Sarno, Lucio ; Tsiaks, Ilias|
|Sponsors:||Warwick Business School|
|Extent:||ix, 175 leaves : charts|
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