City Research Online

Abstract

This thesis consists of three essays on international finance.

In the first study, we examine the properties of carry trade and momentum returns in the interwar period currency markets. We find that these active currency trading strategies earn an annualized average excess return of about 7%, consistent with estimates from modern samples. On the grounds that the interwar period represents rare events better than modern samples, we provide evidence unfavorable to the rare disaster based explanation for the returns to the carry trade and momentum. Global FX volatility risk, however, turns out to account for the carry trade return in the interwar sample as well as in modern samples.

In the second study, we provide a scientific account for the risk-off phenomenon which refers to a change in risk preferences and the effect on asset prices of the associated portfolio rebalancing. We identify risk-off episodes as a switch to a polarized correlation regime of currency returns. These risk-off transitions are relatively infrequent but noticeably increasing over time. They are persistent and associated with geopolitical events. Finally, risk-off switches are unrelated to changes in macroeconomic fundamentals and to other shocks. Risk-off switches have very significant spill-over to the returns of broad asset classes and trading strategies and are associated with significant changes in the positions of professional investors across different financial markets.

In the third study, we explore the broader implications of the present value relations for return predictability. More specifically, we estimate global risk premium factors in international stock markets, international bond markets, and the currency markets from the whole cross-section of present value measures (the price-dividend ratio, bond yields, and the real exchange rate, respectively for the abovementioned three asset classes). We find that the global risk premium factors: substantially improve the predictability of returns relative to the asset-specific present value measures; are intimately linked with macroeconomic fundamentals; and imply strong and consistent exchange rate predictability.

Publication Type:	Thesis (Doctoral)
Subjects:	H Social Sciences > HG Finance
Departments:	Bayes Business School > Finance Doctoral Theses Bayes Business School > Bayes Business School Doctoral Theses

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