City Research Online

Abstract

This thesis comprises three essays on international finance and asset prices. The research uses international macroeconomic data and asset prices to answer questions in the field of macro-finance. The first chapter shows that global inflation risk is priced in the international equity market and that its risk premium is strongly time-varying. This time variation is intimately tied to the fluctuations in the cyclical nature of inflation around the world. Indeed, I document a simultaneous shift in the global inflation risk premium and the covariance between inflation and future consumption growth during the 2008 financial crisis. I rationalise the time variation and sign-switch in the predictive content of inflation with the effect of the zero lower bound (ZLB).

The second chapter is co-authored with Juan Antolin-Diaz, Gino Cenedese and Lucio Sarno and focuses on the impact of the US monetary policy on currencies. We find that currencies that react more negatively to tightening monetary policy shocks or more positively to positive central bank information shocks earn higher average excess returns. Currency characteristics help explain the heterogeneity of this reactivity across currencies and over time. We build exposure indices to gauge this effect using high-frequency co-movement of
interest rates and stock prices around policy announcements. Long-short trading strategies that use such exposure indices as a signal display significant alpha after controlling for the dollar and carry factors. Thus, investors require compensation to hold the currencies that are more sensitive to the US monetary policy.

The third chapter is co-authored with Lucio Sarno and Maik Schmeling. It provides an empirical investigation of the importance of trade balance news in explaining the puzzling high returns to the well-known ‘currency price momentum’ strategy, i.e. the currency strategy that relies on past return continuation among winner and loser currencies. To do this, we introduce another currency strategy, denoted as trade news momentum, which is driven by the heterogeneous currency responses to trade balance news announcements. We find that returns to the trade news momentum command strong explanatory power toward the currency price momentum alpha. Furthermore, we show that the cross-sectional variation in the currency exposure to trade news is understandable in terms of basic economics of exchange rate regimes and the level of capital account restrictions of a country.

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

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