Sun, Wu. / Thesis (M.Phil.)--Chinese University of Hong Kong, 2008. / Includes bibliographical references (leaves 43-45). / Abstracts in English and Chinese. / Abstract --- p.I / 摘要 --- p.II / Acknowledgments --- p.III / Chapter Essay 1. --- The Effect of Impatience on Determinacy --- p.1 / Chapter 1.1 --- Introduction --- p.1 / Chapter 1.2 --- The model --- p.2 / Chapter 1.3 --- Conclusion --- p.8 / Chapter Essay 2. --- Determinacy under Non-separable Utility --- p.9 / Chapter 2.1 --- Introduction --- p.9 / Chapter 2.2 --- The basic model --- p.10 / Chapter 2.3 --- Conclusion --- p.21 / Chapter Essay 3. --- Determinacy under Calvo-Style Sticky Price Model --- p.23 / Chapter 3.1 --- Introduction --- p.23 / Chapter 3.2 --- The model --- p.24 / Chapter 3.2.1 --- With staggered price only --- p.24 / Chapter 3.2.2 --- Incorporating firm-specific capital --- p.30 / Chapter 3.2.3 --- Incorporating staggered wages --- p.35 / Chapter 3.3 --- Conclusion --- p.41 / Reference --- p.43 / Appendix --- p.46 / Table 1: Baseline Calibration --- p.46 / Table 2: Baseline Calibration --- p.46

A research report submitted to the University of the Witwatersrand in partial fulfilment of the requirements for the degree of Master of Management in Finance and Investment. / This study examines Quantitative Easing policy programs of developed countries and their potential impact on Middle Income Countries through capital inflows. The study specifically focuses on the United States and European Union Quantitative Easing programs and investigates potential effects through the various transmission channels. An Autoregressive Multifactor MIDAS approach is used to carry out the empirical analysis and the study finds that lagged capital inflows are highly significant across the different models run and that there is evidence of transmission of quantitative easing to capital inflows to Middle Income Countries along the portfolio rebalancing and liquidity channels. / MT2017

[pt] A teoria da paridade da taxa de juros relaciona os mercados cambiais com os mercados financeiros internacionais. A paridade descoberta da taxa de juros considera que a rentabilidade esperada dos títulos domésticos e estrangeiros é a mesma; no entanto, diversos testes empíricos demonstraram que esta teoria não é válida no curto prazo. Esta não-verificação possibilitou a criação de uma estratégia financeira, o carry trade, que acontece quando se toma emprestado dinheiro em países com baixas taxas de juros para aplicá-lo em países onde as taxas de juros são maiores. O objetivo deste estudo é verificar a validade da condição de paridade de juros entre as taxas brasileira e americana, e investigar a relação deste carry trade com variáveis financeiras relacionadas: a taxa de câmbio real-dólar, o diferencial entre as taxas de juros dos Estados Unidos e do Brasil, os mercados acionários nos dois países, e o sentimento do investidor no mercado brasileiro. A análise empírica foi realizada através dos modelos MQO (Mínimos Quadrados Ordinários), GMM (Generalized Method of Moments) e SVAR (Structural Vector Autoregression). / [en] Interest rate parity theory relates exchange rate markets to international financial markets. The Uncovered interest rate parity condition considers the expected returns of investing in domestic or foreign assets to be equal; even so, empirical tests show this theory cannot be verified on the short run. This enabled a profitable strategy, the carry trade, which consists in borrowing money in a low interest rate currency and investing in bonds in a high interest rate currency. This study tries to verify the interest rate parity condition between Brazilian and American interest rates, and investigate the relationship among this carry trade and related financial variables: the real-dollar exchange rate, the interest rates differential, the stock markets in the two countries and the investor’s sentiment in the Brazilian market. Empirical analysis used the models OLS (Ordinary Least squares), GMM (Generalized Method of Moments) and SVAR (Structural Vector Autoregression).

A popular class of yield curve models is based on the Nelson and Siegel (1987) (hereafter NS) approach of fitting yield curve data with simple functions of maturity. However, NS models are not theoretically consistent and they also lack an economic foundation, which limits their wider application in finance and economics. This thesis derives an intertemporally-consistent and arbitrage-free version of the NS model, and provides an explicit macroeconomic foundation for that augmented NS (ANS) model. To illustrate the general applicability of the ANS model, it is then applied to four distinct topics spanning finance and economics, each of which are active areas of research in their own right: i.e (1) forecasting the yield curve; (2) investigating relationships between the yield curve and the macroeconomy; (3) fixed interest portfolio management; and (4) investigating the uncovered interest parity hypothesis (UIPH). In each application, the ANS model allows the formal derivation of a parsimonious theoretical framework that captures the essence of the topic under investigation and is readily applicable in practice. Respectively: (1) the intertemporal consistency embedded in the ANS model results in a vector-autoregressive equation that projects the future yield curve from the current yield curve, and forecasts from that model outperform the random-walk benchmark; (2) the economic foundation for the ANS model leads to a single-equation relationship between the current shape of the yield curve and the magnitude and timing of future output growth, and empirical estimations confirm that the theoretical relationship holds in practice; (3) the ANS model provides a theoretically-consistent framework for quantifying risk and returns in fixed interest portfolios, and portfolios optimised ex-ante using that framework outperform a passive benchmark; and (4) the ANS model allows interest rates to be decomposed into a component related to economic fundamentals in the underlying economy, and a component related to cyclical influences. Empirical tests based on the fundamental interest rate components do not reject the UIPH, while the UIPH is rejected based on the cyclical interest rate components. This provides empirical support for suggestions in the theoretical literature that interest rate and exchange rate dynamics associated with cyclical interlinkages between the economy and financial markets under rational expectations may contribute materially to the UIPH puzzle.

This study explores the inter relationships between the nominal interest rates of Australia and its principal trading partners. The analysis focus on the short end of the yield curve --specifically, rates of up to one year to maturity. In essence, the study comprises a suite of essays, which together provide an overall understanding of the relevant relationship that is, in both depth and scope, greater than the sum of the individual essays. The inquiry begins with an investigation of the impact of the overnight information content of international interest rates upon the Australian domestic money market. The results indicate that the strongest information impact on Australian interest rates is from the overnight interest and exchange rates of the United States. This is followed, in the second essay, by an investigation of the relationship between domestically and internationally traded Australian dollar denominated, financial assets. The results indicate that a Euro-Australian dollar inter-bank deposit and Australian bank accepted bills are effectively the same assets. Based on this result the third essay investigates the extent to which the short-term nominal interest rates of Australia, the United Kingdom, the United States and Japan are consistent with the expectations theory of the interest rate term structure. The results indicate that nominal inter-bank deposit rates in all four currencies are broadly consistent with the expectations theory. In addition, two common stochastic trends are identified, which can be associated with the markets of the United States and Japan. The forth essay focuses on the bilateral relationships between the nominal interest rates of Australia, the United States, the United Kingdom and Japan, and aims at establishing the extent to which the observed data is consistent with interest rate parity conditions. It was found that, in the long run, and with some exceptions, there is strong support for all three of the usual parity conditions. These relationships are interpreted as a measure of the efficiency with which the interest rates are simultaneously determined across the four markets. The final essay brings together insights gained in the preceeding essays to help analysis the interactions between each of the four markets at each of the four maturities selected within the consistent framework of a single model. The results indicate that the system can be usefully conceptualised as interactions between two sub-systems. The first sub-system models the nexus between Australia and the United States, and the second sub-system, that between the United Kingdom and Japan. The interactions within and between these two sub-systems are found to change as the maturity increases. At the shortest maturity, Australian interest rates are directly affected by both sub-systems. In contrast, at the longest maturity, Australian interest rates anticipate those of the United States and are not directly affected by the second sub-system.

This dissertation contains a series of essays that provide empirical evidence for Australia on some fundamental predictions of real business cycle models and on the convergence and persistence of real interest rates. Chapter 1 provides a brief introduction to the issues examined in each chapter and provides an overview of the methodologies that are used. Tests of various basic predictions of standard real business cycle models for Australia are presented in Chapters 2, 3 and 4. Chapter 2 considers the question of great ratios for Australia. These are ratios of macroeconomic variables that are predicted by standard models to be stationary in the steady state. Using time series econometric techniques (unit root tests and cointegration tests) Australia great ratios are examined. In Chapter 3 a more restrictive implication of real business cycle models than the existence of great ratios is considered. Following the methodology proposed by Canova, Finn and Pagan (1994) the equilibrium decision rules for some standard real business cycle are tested on Australian data. The final essay on this topic is presented in Chapter 4. In this chapter a large-country, small-country is used to try and understand the reason for the sharp rise in Australia??s share of world output that began around 1990. Chapter 5 discusses real interest rate linkages in the Pacific Basin region. Vector autoregressive models and bootstrap methods are adopted to study financial linkages between East Asian markets, Japan and US. Given the apparent non-stationarity of real interest rates a related issue is examined in Chapter 6, viz. the persistence of international real interest rates and estimation of their half-life. Half-life is selected as a means of measuring persistence of real rates. Bootstrap methods are employed to overcome small sample issues in the estimation and a non-standard statistical inference methodology (Highest Density Regions) is adopted. Chapter 7 reapplies the High Density Regions methodology and bootstrap half-life estimation to the data used in Chapters 2 and 5. This provides a robustness check on the results of standard unit root tests that were applied to the data in those chapters. Main findings of the thesis are as follows. The long run implications of real business cycle models are largely rejected by the Australia data. This finding holds for both the existence of great ratios and when the explicit decision rules are employed. When the small open economy features of the Australian economy are incorporated in a two country RBC model, a country-specific productivity boom seems to provide a possible explanation for the rise in Australia??s share of world output. The essays that examine real interest rates suggest the following results. Following the East Asian financial crisis in 1997-98 there appears to have been a decline in the importance of Japan in influencing developments in the Pacific Basin region. In addition there is evidence that following the crisis Korea??s financial market became less insular and more integrated with the US. Finally results obtained from the half-life estimators suggest that despite the usual findings from unit root tests, real interest rates may in fact exhibit mean-reversion.

<p>Essay 1 - To evaluate measures of expectations I examine and compare some of the most common methods for capturing expectations: the futures method which utilizes financial market prices, the VAR forecast method, and the survey method. I study average expectations on the Federal funds rate target, and the main findings can be summarized as follows: i) the survey measure and the futures measure are highly correlated; the correlation coefficient is 0.81 which indicates that the measures capture the same phenomenon, ii) the survey measure consistently overestimates the realized changes in the interest rate, iii) the VAR forecast method shows little resemblance with the other methods.</p><p>Essay 2 - This paper takes a critical look at available proxies of uncertainty. Two questions are addressed: (i) How do we evaluate these proxies given that subjective uncertainty is inherently unobservable? (ii) Is there such a thing as a general macroeconomic uncertainty? Using correlations, some narrative evidence and a factor analysis, we find that disagreement and stock market volatility proxies seem to be valid measures of uncertainty whereas probability forecast measures are not. This result is reinforced when we use our proxies in standard macroeconomic applications where uncertainty is supposed to be of importance. Uncertainty is positively correlated with the absolute value of the GDP-gap.</p><p>Essay 3 - The co-movements of exchange rates and interest rates as the economy responds to shocks is a potential source of deviations from uncovered interest rate parity. This paper investigates whether an open economy macro model with endogenous monetary policy is capable of explaining the exchange rate risk premium puzzle. When the central bank is engaged in interest rate smoothing, a negative relationship between exchange rate changes and interest differentials emerge for realistic parameter values without assuming an extremely large and variable risk premium as done in previous studies.</p><p>Essay 4 - This paper shows how market expectations as a function of the forecasting horizon can be constructed and used to analyse issues like how far in advance monetary policy actions are anticipated and how the market’s understanding of monetary policy has developed over time. On average about half of a monetary policy action is anticipated one month before a policy meeting. The share of fully anticipated FOMC policy decisions increase from less than 10% at the two-month horizon, to about 70% at the one-day horizon. The market ability to predict policy has improved substantially after 1999 as the fraction of fully anticipated meetings has quadrupled at the monthly horizon. This improvement can be described as an effect of increased central bank transparency.</p>

In this dissertation we use Dynamic Stochastic General Equilibrium DSGE) models to explain empirical regularities and policy implications related to (1) durable goods, interest rates and small open economy business cycles, (2) Terms-of-Trade (ToT) and economic fluctuations in small open economies and (3) Budget Stabilization Funds (BSFs) and States’ business cycles. In the first essay, we document that durable spending in developed small open economies constitutes a large share of their total income. Their spending is highly procyclical, sensitive to interest rates, and leads the business cycle. We address these regularities with a RBC model with durable goods. The model successfully replicates the observed business cycle regularities and explains many anomalies not explained in the existing literature. It also emphasizes the role of interest rates uncertainty in explaining the dynamics of the small open economies. The second essay addresses the impacts of the ToT fluctuation on the business cycles of various small open economies. We argue that differences in the degree of durability in domestic production and imports may make these economies more or less sensitive to an identical ToT shock. We found that economies with higher durability usually enjoy more stable business cycle comparing with economies with lower degree of durability. Differences in the persistence of the ToT do affect the dynamic of the external accounts but it cannot explain the observed differences business cycles across small open economies. In the last essay, we evaluate the economic impacts of the Budget Stabilization Funds (BSF) on State-level business cycles. We lay out a State economy RBC model in which a State’s government applies a designated saving rule consistent with households’ optimization. Given the suggested rule we find that the BDFs become a significant automatic stabilizer. It is not only mitigates the procyclicality of the government spending but it also smooth the State’s business cycle.

This thesis presents the main results of my research in the field of computational finance and portfolios optimization. We focus on pricing Asian basket options and portfolio problems in the presence of inflation with stochastic interest rates. In Chapter 2, we concentrate upon the derivation of bounds for European-style discrete arithmetic Asian basket options in a Black and Scholes framework.We start from methods used for basket options and Asian options. First, we use the general approach for deriving upper and lower bounds for stop-loss premia of sums of non-independent random variables as in Kaas et al. [Upper and lower bounds for sums of random variables, Insurance Math. Econom. 27 (2000) 151–168] or Dhaene et al. [The concept of comonotonicity in actuarial science and finance: theory, Insurance Math. Econom. 31(1) (2002) 3–33]. We generalize the methods in Deelstra et al. [Pricing of arithmetic basket options by conditioning, Insurance Math. Econom. 34 (2004) 55–57] and Vanmaele et al. [Bounds for the price of discrete sampled arithmetic Asian options, J. Comput. Appl. Math. 185(1) (2006) 51–90]. Afterwards we show how to derive an analytical closed-form expression for a lower bound in the non-comonotonic case. Finally, we derive upper bounds for Asian basket options by applying techniques as in Thompson [Fast narrow bounds on the value of Asian options, Working Paper, University of Cambridge, 1999] and Lord [Partially exact and bounded approximations for arithmetic Asian options, J. Comput. Finance 10 (2) (2006) 1–52]. Numerical results are included and on the basis of our numerical tests, we explain which method we recommend depending on moneyness and time-to-maturity In Chapter 3, we propose some moment matching pricing methods for European-style discrete arithmetic Asian basket options in a Black & Scholes framework. We generalize the approach of Curran M. (1994) [Valuing Asian and portfolio by conditioning on the geometric mean price”, Management science, 40, 1705-1711] and of Deelstra G., Liinev J. and Vanmaele M. (2004) [Pricing of arithmetic basket options by conditioning”, Insurance: Mathematics & Economics] in several ways. We create a framework that allows for a whole class of conditioning random variables which are normally distributed. We moment match not only with a lognormal random variable but also with a log-extended-skew-normal random variable. We also improve the bounds of Deelstra G., Diallo I. and Vanmaele M. (2008). [Bounds for Asian basket options”, Journal of Computational and Applied Mathematics, 218, 215-228]. Numerical results are included and on the basis of our numerical tests, we explain which method we recommend depending on moneyness and time-to-maturity. In Chapter 4, we use the stochastic dynamic programming approach in order to extend Brennan and Xia’s unconstrained optimal portfolio strategies by investigating the case in which interest rates and inflation rates follow affine dynamics which combine the model of Cox et al. (1985) [A Theory of the Term Structure of Interest Rates, Econometrica, 53(2), 385-408] and the model of Vasicek (1977) [An equilibrium characterization of the term structure, Journal of Financial Economics, 5, 177-188]. We first derive the nominal price of a zero coupon bond by using the evolution PDE which can be solved by reducing the problem to the solution of three ordinary differential equations (ODE). To solve the corresponding control problems we apply a verification theorem without the usual Lipschitz assumption given in Korn R. and Kraft H.(2001)[A Stochastic control approach to portfolio problems with stochastic interest rates, SIAM Journal on Control and Optimization, 40(4), 1250-1269] or [45].

This thesis consists of three self-contained papers covering different aspects of public debt management. From a methodological point of view they all have in common that results and models from the theory of finance are used to analyze the effects of public debt management. The first paper, Neutrality of Public Debt Management, studies the case when public debt management does not matter, i.e. when it is neutral. Although strong assumptions are needed to ensure neutrality of public debt management it is nevertheless of interest to study it, since an analysis illuminates the mechanisms through which public debt management affects the economy. The paper starts with a discussion of the assumptions that are needed to ensure neutrality in the models used in the literature. The remainder of the paper tries to relax some of these assumptions. The model employed is an intertemporal general equilibrium model. It is shown that if the agents are identical, public debt is neutral provided the agents pierce the veil of government, and all taxes associated with public debt are lump-sum. It is also shown that if the agents are different but have sufficiently similar utility functions that exhibit hyperbolic absolute risk aversion (i.e., the agents have linear risk tolerance), public debt management is neutral in aggregates, provided the agents pierce the veil of government and all taxes associated with the debt service are lump-sum. This means that public debt management neither affects prices nor aggregate consumption; it might, however affect the individual agent’s consumption-savings decision. Since the class of utility functions that exhibit hyperbolic absolute risk aversion is widely used in economic analysis, this result has several theoretical and empirical implications. The result also has implications for the choice of model in the third paper of the thesis. The second paper, Objectives of Public Debt Management, discusses the objectives of public debt management in an atemporal mean-variance framework. The model employed in this paper differs in one important aspect from the ones previously used in the literature; it takes the firms’ investment decisions into account and hence endogenizes the supply of assets to some extent. It is shown that if the firms’ behavior is introduced, objectives that in the literature have been assumed to stimulate the economic activity do not necessarily have the desired effect. The paper also discusses different objectives aiming at welfare-improvements and economic stimulation. Since the analysis is performed in a unified framework, it is possible to compare the objectives and to discuss their welfare implications. Of particular interest is the welfare aspects of minimization of the costs of public debt. Finally, the paper also discusses the effectiveness of the objectives and it is shown that with one exception, cost minimization, effectiveness declines when the government-issued debt instruments’ share of the asset market falls. The last paper, Public Debt Management and the Term Structure of Interest Rates, develops and uses a stochastic overlapping generations model to analyze the impact of public debt management on the term structure of interest rate. In most of the literature public debt management is thought of as changes in the maturity structure of the outstanding public debt. A change in the maturity structure implies that public debt management affects, e.g., future tax liabilities and hedging opportunities. To capture these effects it is necessary to use an intertemporal framework. In contrast to most models in the literature on public debt management, the model in this paper is intertemporal and takes the general equilibrium effects of public debt management into account, by integrating the financial and real sectors of the economy. This means that current and future asset prices, as well as investments are affected by public debt management. The analysis suggests that it is not the quantities of the long-term and short-term bonds, per se, that determine the effects on the term structure of interest rates. What determines these effects is how public debt management affects the hedging opportunities through changes in asset supply, taxes and prices. / Diss. Stockholm : Handelshögskolan