Essays in international finance

Passari, Evgenia (2013). Essays in international finance. (Unpublished Doctoral thesis, City University London)

[img]
Preview
PDF
Download (892kB) | Preview

Abstract

The present thesis comprises three essays in international finance, with a focus on the foreign exchange market. The first chapter assesses the predictive ability of a comprehensive set of empirical models of exchange rates, in addition to a standard technical trading strategy, on monthly exchange-rate returns for four developed and four emerging countries across different horizons. I implement a rolling window approach to the estimation and forecasting of the models, and construct an encompassing forecast. I also assess the economic value of the out-of-sample forecasting power of the empirical models using a simple dynamic allocation strategy, and find three key results: (1) the Taylor rule model consistently outperforms, economically and statistically, all the other models at the 1-month horizon. (2) The technical rule has superior predictive power over the random walk benchmark, across horizons, particularly for developed markets. (3) There are statistical gains from an unrestricted combined forecasting model at the 1-month horizon. The second chapter constitutes a survey that focuses on internationally tradable goods and services. Our motivation is that while excellent surveys exist in the literature on this topic, they focus largely on broad baskets of prices and, most commonly, on the consumer price index. We instead focus on the specific subset of the relevant literature that analyses deviations from the LOP applied to individual goods and services and specific sectors. The emphasis is hence on tradable items rather than broad baskets that also include a substantial nontradable component. Specifically, the objective is to distil the literature on the properties of deviations from the LOP applied to internationally tradable goods or sectors. We conclude that a careful reading of the literature suggests that this notion of PPP holds in the long run for a broad range of tradable goods and services and for a broad set of currencies. In the third chapter, I build a "commodity currency strategy" for exchange rate forecasting that conditions on changes in the global prices of commodity indices. The risk-return profile of this strategy reveals that the predictive ability of commodity prices for the exchange rate appears to be significant, and the returns appear to be uncorrelated to popular exchange rate strategies such as the carry trade and currency momentum. The market factor captures more than 70% of the cross-sectional returns of the proposed strategy and suggests a negative relation between equity returns and currency returns that are driven by commodity price changes. The commodity currency strategy is prone to high transaction costs which can only be circumvented by investing in developed markets with low costs and high liquidity.

Item Type: Thesis (Doctoral)
Additional Information: Chapter 2 of this thesis was co-authored with Ian Marsh and Lucio Sarno and is published in Wiley's Handbook of Exchange Rates (2012), edited by Jessica James, Ian W. Marsh, and Lucio Sarno. As such it has been removed from the attached open access file.
Subjects: H Social Sciences > HG Finance
Divisions: Cass Business School > Faculty of Finance
City University London PhD theses
URI: http://openaccess.city.ac.uk/id/eprint/3062

Actions (login required)

View Item View Item

Downloads

Downloads per month over past year

View more statistics