This thesis models the Australian-US Dollar (AUD/USD) exchange rate with particular attention being paid to investor risk aversion. Accounting for investor risk aversion in AUD/USD exchange rate modelling is novel, so too is the method used to measure risk aversion in this thesis. Investor risk aversion is measured using a technique developed in Bliss and Panigirtzoglou (2004), which makes use of Probability Density Functions (PDFs) extracted from option markets. More conventional approaches use forward-market pricing or Uncovered Interest Parity. Several methods of estimating PDFs from option and spot markets are examined, with the estimations from currency spot-markets representing an original application of an arbitrage technique developed in Stutzer (1996) to the AUD/USD exchange rate. The option and spot-market PDFs are compared using their first four moments and if estimated judiciously, the spot-market PDFs are found to have similar shapes to the option-market PDFs. So in the absence of an AUD/USD exchange rate options market, spot-market PDFs can act as a reasonable substitute for option-market PDFs for the purpose of examining market sentiment. The Relative Risk Aversion (RRA) attached to the AUD/USD, the US Dollar-Japanese Yen, the US Dollar-Swiss Franc and the US-Canadian Dollar exchange rates is measured using the Bliss and Panigirtzoglou (2004) technique. Amongst these exchange rates, only the AUD/USD exchange rate demonstrates a significant level of investor RRA and only over a weekly forecast horizon. The Bliss and Panigirtzoglou (2004) technique is also used to approximate a time-varying risk premium for the AUD/USD exchange rate. This risk premium is added to the cointegrating vectors of fixed-price and asset monetary models of the AUD/USD exchange rate. An index of Australia???s export commodity prices is also added. The out-of-sample forecasting ability of these cointegrating vectors is tested relative to a random walk using an error-correction framework. While adding the time-varying risk premium improves this forecasting ability, adding export commodity prices does so by more. Further, including both the time-varying risk premium and export commodity prices in the cointegrating vectors reduces their forecasting ability. So the time-varying risk premium is important for AUD/USD exchange rate modelling, but not as important as export commodity prices.

The exchange rate market has traditionally played a key role in the financial market. The variation of the exchange rate which is called volatility is also an important feature for studying the exchange rate market because the increased volatility may have a negative effect on a nation's economy by increasing the uncertainty in the exchange market. In this paper the volatility of the exchange rate is considered by means of a Heterogeneous Autoregression Conditional Heteroskedastictity (HARCH) Model. It explains the volatility of the exchange rate market well. In addition, it is assumed that at a random time point a change of a parameter in the distribution of the random process underobservation may occur. Some methods such as the Shewhart method, the Culumative Sum Method (CUSUM) and the ExponentiallyWeighted Moving Average Method (EWMA) are investigated within the frames of this change-point problem. In order to evaluate them, Average Run Length (ARL) and Conditional Expected Delay (CED) will be used asperformance measures.

In this paper we use model-free estimates of daily exchange rate volatilities employing high-frequency intraday data, known as Realized Volatility, which is then forecasted with ARMA-models and used to produce one-day-ahead Value-at-Risk predictions. The forecasting accuracy of the method is contrasted against the more widely used ARCH-models based on daily squared returns. Our results indicate that the ARCH-models tend to underestimate the Value-at-Risk in foreign exchange markets compared to models using Realized Volatility

The aim of the thesis is to identify an appropriate model in forecasting Value-at-Risk on a morevolatile period than that one from which the model is estimated. We estimate 1-day-ahead and10-days-ahead Value-at-Risk on a number of exchange rates. The Value-at-Risk estimates arebased on three models combined with three distributional assumptions of the innovations, andthe evaluations are made with Kupiec's (1995) test for unconditional coverage. The data rangesfrom January 1st 2006 through June 30th 2011. The results suggest that the GARCH(1,1) andGJR-GARCH(1,1) with normally distributed innovations are models adequately capturing theconditional variance in the series.

In this study, we aim to investigate the impact of inflation targeting (IT) and the recent global disinflation on exchange rate pass-through (ERPT) using quarterly data from 1980:1 to 2009:1 for 51 industrial and emerging market (EM) countries. To this end, we employ not only the conventional panel data estimation methods but also the recent Common Correlated Effects Pooled estimation procedure by Pesaran (2006) which allows estimating the impact of common global shocks such as global inflation. We also explore some other determinants of ERPT during the recent global disinflation period. Furthermore, we consider asymmetric effects of positive and negative output gaps as proxies for domestic demand conditions on ERPT for IT industrial and EM countries. Our results strongly suggest that, for the non-IT samples, ERPT is significantly higher in EM countries than industrial countries. For every country groups excluding Euro area countries, we find that ERPT declined substantially during the recent global disinflation period. The decline in the ERPT is, however, much higher in IT countries especially in EM ones. One striking result is the convergence of ERPT coefficients of EM countries to industrial IT countries with the adoption of IT. This supports the endogenous response of ERPT to monetary policy credibility and price stability. Consequently, a high ERPT, per se, may be interpreted as not a binding constraint for the adoption of IT as it tends to decline with the success of monetary policy regime. We also find that ERPT appears to be more sensitive to positive output gaps in IT industrial countries whilst it does not have such a response to positive or negative output gaps in IT emerging market countries.

The question of exchange rate pass-through into domestic inflation is a widely analyzed issue due to its importance as regards to monetary policy, exchange rate policy and in general macroeconomic policy for open economies. Although most of the literature is focused on the exchange rate pass-through at the aggregate level, there are fewer studies that are done at the sectoral level for the Turkish economy. In this study by using a distribution chain of pricing model developed by McCarthy (2000), pass-through of exchange rates and import prices into domestic prices for selected sectors are examined for the Turkish economy. The emprical model estimates a Vector Auto Regression (VAR) to see pass-through dynamics through times and across the selected sectors. This study covers March 2002-December 2010 period / the period of floating exchange rates. Findings indicate that pass-through has fallen recently in Turkey. Moreover, results of the analysis show that external factors explain an important proportion of the variance of domestic prices for the sectors which have a larger import share.

This thesis examines exchange rate exposure of 30 U.S. industries between 1974 and 2008 using traditional and orthogonalized linear models. Similar to the literature, when using traditional linear model we find that exposure is very time dependent and often insignificant. However, we discover that orthogonalization helps uncover more evidence of industry exposure. Within the orthogonalized linear model framework, we find that exposure is statistically and economically important, and the effect of orthogonalization is more pronounced for exposure to currency indices. We also test symmetry in exchange rate exposure by subdividing the sample period into the periods of appreciations and depreciations. Interestingly, we find little evidence that exchange rate is asymmetric even if we use orthogonalized linear model. Lastly, we discover that exchange rate exposure cannot be explained by our international trade data.

This thesis conducts a comprehensive examination on the random walk behavior of 29 foreign exchange rates over the period of floating exchange regime, using variance-ratio tests. The cross-country and time-series test show that random walk model cannot be rejected on majority, and the random walk behavior is quite volatile across the whole floating exchange regime period. It then goes further to explore possible factors that can explain the probability of rejection/ non-rejections on random walk model using linear as well as nonlinear probability models, and find that the factors such as capital openness and investment-to-trade ratio significantly increases the chance of its exchange rate exhibiting random walk behavior.

My dissertation consists of three essays in international capital markets. In Chapter I, we examine the herd trading behavior of institutional investors trading around the world. Using a new transaction-level trades database of 531 U.S. institutional investors trading across 37 countries for the period 2002-2009, we find robust evidence of intra- and inter-period herdings at the monthly frequency. We find no evidence that trades by institutions in our sample destabilize local stock markets. Further analysis shows that: (i) in the buy side, both intra- and inter-period herdings are more pronounced in countries with weaker information environments; and (ii) in the sell side, intra-period herding is more pronounced in countries with stronger information environments, whereas inter-period herding is not significantly related to information environments. In Chapter II, we document that the degree of co-movement between bilateral USD ex- change rates has increased substantially since the introduction of the euro in 1999 and investigate what drives the increased co-movement. For each of our 33 sampled bilateral USD exchange rates, we measure the degree of co-movement using the R-square from re- gressing weekly exchange rate changes on the weekly world exchange rate factor. Our results show that, for the majority of sample exchange rates, the R-square has increased substan- tially over the period 1999-2010. Specifically, the average R-square was 0.15 in 1999, but it increased to 0.47 by more than 200% in 2010. Further analysis reveals that the rising influence of the euro relative to USD over a third currency can explain most of the increase in the measured co-movement over time. In Chapter III, we examine the level and trend of U.S. domestic market integration. For each of our sample states, we construct the state (market) portfolio comprising public firms headquartered within the state and compute R-square, our measure of integration, from regressing state portfolio returns on national stock market factors. Using weekly returns, we estimate the regression for each year of our sample period 1963-2008. The key findings are: (i) For the majority of sample states, the R-square exhibits a statistically significant upward trend, implying that U.S. domestic stock markets were not fully integrated and have been integrating during the sample period; (ii) consistent with the previous result, the explanatory power of the state factor over individual stock returns has been decreasing for the majority of states; and (iii) the increasing integration of U.S. domestic stock markets is associated with the decreasing home state bias, suggesting that investors' pursuit of nation- wide investment opportunities may be a significant driver of domestic financial integration.

Thesis (doctoral)--Göteborgs universitet, 2002. / Extra t.p. with thesis statement inserted. Includes bibliographical references.