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Three essays on empirical finance
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Wang, Chao (2018) Three essays on empirical finance. PhD thesis, University of Warwick.
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Official URL: http://webcat.warwick.ac.uk/record=b3361903~S15
Abstract
This thesis comprises three essays on different topics of empirical finance. Particularly, the first paper (chapter 2) studies the effects of central bank intervention; The second paper (chapter 3) proposes a novel method to calibrate the predictability of exchange rates; The third paper (chapter 4) investigates the price stability in the era of high frequency trading: whether the U.S. stocks suffer more from transient jumps than they used to.
Chapter 2 studies the effects of Japanese central bank intervention from the market microstructure perspective. We measure its impact on the price and volatility level, and other market participants' behavior. The endogeneity problem is solved by adopting a novel instrumental variable: the long run part of the intervention time series. The empirical results indicate that adopting this IV does make qualitative differences. We show that the intervention successfully moves the price level of JPY/USD, and increases the volatility. The empirical evidence supports the damping channel, but not the coordination channel. The intervention has relatively persistent price impact, which lasts for roughly 16 days. Moreover, the Markov switching model shows that the intervention has greater price impact in the high volatility regime, and vice versa.
Chapter 3 introduces a nonparametric model-independent methodology to calibrate the predictability of exchange rates. In order to predict the exchange rates, the predictors should contain enough information about the future return, regardless of the specification of the model. The information transfer from the predictors to future return can be measured by their mutual information. According to Shannon's channel coding theorem, it is the measure of the statistical dependence, linear and nonlinear, and not just the linear dependence as the correlation coefficient measures. The information transfer also acts as the upper bound of the predictive power of any model based on these predictors. Empirically, we evaluate the predictability at the hourly, daily and monthly frequency, and find that exchange rates are systematically predictable intraday, but not on other frequencies. Moreover, the linear model is suboptimal and fails to capture most of the information, which explains why it is so hard for the traditional linear models to outperform the random walk benchmark.
Chapter 4 conducts a comprehensive empirical exercise to identify all the permanent and transient jumps in the 20 years Trade and Quote (TAQ) data. We aim to answer the following questions: whether the markets have become more unstable, and if HFTs are responsible for causing the increased instability. Empirically, we document the cross-sectional variations: the small market cap, low volume and market liquidity, and low-priced stocks become more unstable, and most of the increased jumps are transient, which cannot be attributed to the increase in information events. On the other hand, the large market cap, high volume and liquidity, and high-priced stocks suffer from fewer price jumps. The structural change of the jumps happens around 2003, which coincides with the auto-quote implementation. We also find further supporting evidence that more HFT participation is associated with more jumps.
Item Type: | Thesis (PhD) | ||||
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Subjects: | H Social Sciences > HG Finance | ||||
Library of Congress Subject Headings (LCSH): | Finance -- Mathematical model, Banks and banking, Central, Intervention (Federal government), Foreign exchange rates, Stock exchanges | ||||
Official Date: | 2018 | ||||
Dates: |
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Institution: | University of Warwick | ||||
Theses Department: | Warwick Business School | ||||
Thesis Type: | PhD | ||||
Publication Status: | Unpublished | ||||
Supervisor(s)/Advisor: | Kozhan, Roman, 1980- ; Moore, Michael J., 1953 November 28- | ||||
Format of File: | |||||
Extent: | ix, 162 leaves : charts | ||||
Language: | eng |
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