The three chapters of this thesis address two questions. First, how are real and nominal exchange rates between different national currencies determined? Second, how does this determination influ- ence the international transmission of macroeconomic fluctuations and, especially, monetary policy disturbances? Chapter 1 comprises an empirical evaluation of long-run purchasing power parity as a theory of equilibrium nominal exchange rate determination for the post-Bretton Woods data. Structural time series methods are used to identify bivariate moving average representations of nominal exchange rates and relative goods prices and to test whether these empirical representations are consistent with the implications of purchasing power parity. Long-run purchasing power parity can be un ambiguously rejected for the G- 7 countries. There are permanent deviations from parity which account for almost all of the variance of real exchange rates, and which are driven by permanent disturbances to nominal rates which are never reflected in relative goods prices. Chapter 2 presents an empirical evaluation of the hypothesis that the global Depression of the 1930’s was attributable to international transmission of (idiosyncratic) U.S. monetary policy actions through the International Gold Exchange Standard - fixed exchange rate - regime. Specifically, the analysis evaluates whether the interwar output collapse in Canada was caused by transmitted U.S. monetary policy disturbances. A multivariate structural time series representation of the Cana dian macroeconomy is estimated which is consistent with the dynamic and long-run equilibrium properties of a Mundell- Fleming small open economy model and in which U.S. data represent the ‘rest of the world’. The empirical results show that U.S. monetary disturbances play a negligible role for both Canadian and U.S. output movements in the 1930’s. Permanent common real shocks to outputs can account for the onset, depth and duration of the Depression in both economies. There is little evidence to support a Gold-Standard transmitted global output collapse through the transmission mechanisms usually associated with purchasing power parity theories of real exchange rate determination. Chapter 3 develops an alternative theory of real and nominal exchange rate determination and of the international transmision mechanism which can account for many stylized facts regarding the empirical behaviour of real and nominal exchange rates that long-run purchasing power parity fails to explain. In a two-country, two-currency overlapping generations model, the role of optimal portfolio choices between internationally traded assets is emphasized - rather than goods market trade - as the source of currency demands. These demands, and supplied of assets generated by domestic monetary policies, determine both real and nominal exchange rates. Here, monetary policy changes can induce permanent international and intra-national reallocations through real exchange rate and real interest rate adjustments. This transmission mechanism differs markedly from that implied by purchasing power parity. / Business, Sauder School of / Graduate

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<p>This dissertation addresses three key issues in international finance and economics: the uncovered interest rate parity puzzle in exchange rates, the home bias puzzle in portfolio allocations, and the surprising lack of correlation between terms of trade shocks and output in small open economies. </p><p>The first chapter shows that the much-studied Uncovered Interest Rate Parity (UIP) puzzle, the observation that exchange rates do not adjust sufficiently to offset interest rate differentials, is more complicated than commonly understood. I show that the puzzle changes nature with the horizon. I confirm existing short-run evidence that high interest rate currencies depreciate less than predicted by the interest rate differential. But, building on Engel (2012), at longer horizons (4 to 7 years) I find a reverse puzzle: high interest rate currencies depreciate too much. Interestingly, the long-horizon excess depreciation leads exchange rates to converge to the UIP benchmark over the long-run. To address the changing nature of the puzzle, I propose a novel model, based on the mechanism of bond convenience yields, that can explain both the short and the long horizon UIP violations. I also provide direct empirical evidence that supports the mechanism. </p><p>In chapter 2, I address the puzzling observation that portfolios are concentrated in asset classes which comove strongly with the non-financial income of investors. As an explanation, I propose a framework of endogenously generated information asymmetry, where rational agents optimally choose to focus their limited attention on risk factors that drive both their non-financial income and some of the risky asset payoffs. In turn, the agents concentrate their portfolios in assets driven by those endogenously familiar factors. I explore an uncertainty structure that implies decreasing returns to information, whereas the previous literature has focused on a setup with increasing returns. I show that the two frameworks have differing implications, which I test in the data and find support for decreasing returns to information. </p><p>In chapter 3, I address the puzzling lack of correlation between Terms of Trade (ToT) and the Small Open Economy (SOE) GDP. A SOE model typically relies on three sources of exogenous disturbances: world real interest rate, Terms of Trade (ToT) and technology. However, the empirical literature has failed to reach a consensus on the relative importance of the terms of trade as a driver of business cycles, with some papers claiming they are hugely important while others find no evidence of a relationship at all. Kehoe and Ruhl (2008) have recently shown that the weak empirical link between ToT and the GDP might be due to measurement limitations with the output series in an open economy framework. This paper merges data on national accounts with data on global trade flows for a panel of 31 countries and finds that Terms of Trade have a negligible effect on GDP but a strong effect on aggregate consumption. The evidence supports the hypothesis that ToT are important drivers of business cycles, but measurement issues with GDP obscure their relationship with real output. This further suggests that researchers should be careful when equating model output with measured GDP in an open economy setup.</p> / Dissertation

This thesis provides international evidence relating to the impact of financial liberalisation on banking sector performance. Compared to a large number of studies linking financial liberalisation to economic growth and financial fragility, there is relatively little research at the international level linking financial liberalisation to banking sector efficiency and productivity. The research contributes to the literature by making a systematic, cross-country empirical investigation using domestic and international measures of financial liberalisation and evaluates their impact on bank efficiency and productivity by applying a combination of frontier estimation methods, dynamic panel data regressions and Granger causality techniques. The evidence is based on the use of bank-level accounting data and country-level economic data for a sample of 1536 commercial banks covering 88 countries over the period 2000 to 2009. Apart from using the global frontier for estimation of bank efficiency, empirical analysis is conducted across various levels including the use of separate income-group frontiers to determine the robustness of the findings. Using stochastic frontier analysis (SFA) for the estimation of banks’ cost and profit efficiency, the evidence shows that financial liberalisation contributes positively to profit efficiency while the effect on cost efficiency is generally mixed, depending on the measures of financial liberalisation used. Additionally, the results show that while cost efficiency remains, on average, stable during the estimation period (2000-2009), average profit efficiency fluctuates in the pre-crises period (2000-06) but declines sharply during the post crises period (2007-09). Furthermore, accounting explicitly for the influence of risk in banking, the evidence suggests that financial liberalisation, lower cost efficiency and higher profit efficiency of banks all increase the potential for default risk, while the latter also reduces both cost and profit efficiency, providing support for the bad management hypothesis. Additionally, upon accounting explicitly for the role of market power or competition in banking, the evidence suggests that both financial liberalisation and greater market power contribute to higher default risk of banks. On the other hand, greater competition in banking contributes to higher cost but lower profit efficiency of banks under financial liberalisation. The cross-country empirical investigation is also extended to analyse the impact of financial liberalisation on banks’ technical efficiency and productivity growth, using a two-step approach of combining data envelopment analysis (DEA) with panel data regressions. The evidence here suggests that financial liberalisation is robustly and negatively associated with (pure) technical efficiency. Furthermore, the effect on the total factor productivity (TFP) growth (using two-step DEA-type Malmquist method) is positive, although not always statistically significant. The robustness analysis conducted across the different income groups (higher, upper-middle, lower-middle and lower) confirms that the impact on cost, profit and technical efficiency of banks is more pronounced in the more developed (higher and upper-middle) countries than in the less developed countries. In particular, the impact of financial liberalisation is largely insignificant in the lower income countries. This finding generally reflects the greater pace of capital account liberalisation in the higher and upper-middle income countries, where the impact on both cost and profit efficiency is positive. Throughout the analysis, the estimation takes into account country-specific differences in the regulatory, market structure, financial development and macro-economic conditions and the evidence shows that these influences are also mostly significant and robust under financial liberalisation. Hence, the thesis concludes by arguing that financial liberalisation exerts an independent effect on the cost, profit and technical efficiency of banks, while the risks associated with financial liberalisation should be mitigated with better regulatory and institutional structures.

Masters of Management in Finance and Investments, University of the Witwatersrand Johannesburg, 2016 / Financial economists have spent a considerable amount of time trying to understand the impact of macroeconomic news announcements on exchange rates, more so evaluating how new information is incorporated into exchange rates. This study examines the impact of macroeconomic news announcements on exchange rate volatility. Unlike most studies that utilise developed market currency pairs, this study utilises high frequency USD/ZAR data. Macroeconomic news can affect exchange rates directly and indirectly through public and private information. However, this study only focuses on scheduled macroeconomic news announcements as they usually have market forecasts available to conduct analysis regarding the asymmetric news effects. The following asymmetries are evaluated into the study: news items by geographical location, no-news vs. surprise news announcements and positive vs. negative news announcements. We make the following findings in our empirical study: (i) After the release of a news announcement, the level of foreign exchange volatility rises. This event is independent of whether the news item surprised the market or not. (ii) We find that both South African and US news items significantly impact USD/ZAR volatility, suggesting that both US and South African news items are being used to formulate investor expectations regarding the future prospects of the currency pair. (iii) Negative news appears to have a greater impact on exchange rate volatility relative to positive news. This result is also state dependent, as investors tend to behave differently to news depending on the economic climate at that point in time. Investor cognitive biases also give rise to the asymmetric news effects on exchange rate volatility. Investors do not always act in rational manner, especially when faced with multiple news items that are contradictory to each other. / XL2018

This dissertation consists of three essays on exchange rates and international finance with an emphasis on emerging economies. In Chapter 1, I provide empirical evidence that supports the hypothesis that exchange rate based stabilization programs are expansionary during their early phases. I derive a new set of stabilization episodes using extensive country chronologies from Reinhart and Rogoff (2004) and I find that even after controlling for external conditions, the initial expansion associated with the introduction of an exchange rate based program, is caused by both, the program itself and positive external conditions. These expansionary effects are robust to different estimation methods and different criteria for detecting stabilization episodes. In Chapter 2, I study the relationship between foreign interest rates, country spreads, terms of trade and macro fundamentals in emerging markets. I estimate a structural VAR for 15 emerging economies. I find that country spreads explain 12% of output fluctuations, foreign interest rates an additional 7% and the terms of trade about 5%. I also find that country spreads account for a quarter of real exchange rate variability while the terms of trade account for just 1%. To further validate these results, I develop a dynamic stochastic general equilibrium (DSGE) model for a small open economy. The model incorporates several open economy frictions: i) bond-holding adjustment costs, ii) investment adjustment costs, iii) a working capital constraint, and iv) a country spread component that depends upon macro fundamentals, which is taken from the estimated VAR. The model is able to replicate fairly good the propagation effects of foreign rates and country spread shocks but overestimates the importance of the terms of trades. In Chapter 3, I investigate the relation between volatility in the foreign exchange market and excess returns on carry trade portfolios for the G10 currencies. I develop and compare three different investment strategies that aim at avoiding losses when volatility jumps, a common feature of the carry trade. I find that two trading strategies, one based on implied volatility from FX options and the other on exponentially-weighted moving averages, provide better risk-adjusted returns than the standard carry trade. A third strategy, based on Markov-switching exchange rate forecasts, provides excess returns for some currencies but fails for portfolios of currencies. I also show that currency investing provides superior Sharpe ratios than a benchmark bond portfolio and a benchmark stock portfolio, even after including the recent global financial crisis.

This dissertation explores the role of law in the financial development of an emerging economic country. Its main proposition is that law plays a fundamental part in both the construction and the subsequent failure of a financial system, in addition to the function of reducing frictions and distortions in order to maintain the orderly running of the market. The dissertation illustrates the aforementioned proposition with an in-depth case study of the Asian Financial Crisis (AFC) which was initially rooted in the Thai financial sector. Aided by the analytical paradigm offered by Legal Theory of Finance, it parses the legal and institutional aspects of the rapidly developing financial markets in Thailand and her investing partners. This allows the ensuing Crisis to be seen from the previously underexplored institutional underpinning of the volatile financial cycle which characterized the region at the time. Subsequently, the dissertation employs the same intellectual framework in order to explain the post-crisis reform initiatives and their systemic implications for the regional financial architecture under the auspices of the Association of the South East Asian Nations. This dissertation cuts across a number of disciplines: law and finance, law and economic development, financial and banking regulation, international financial law, to name but a few.

This thesis explores the interplay between global finance and remote firms and institutions. It highlights the interactions between global institutional investors and Japanese firms on environmental, social, and corporate governance (ESG) standards, and the process of change in Japanese corporate governance practices. It focuses on analysing the responses of large Japanese firms with a high level of foreign ownership to global finance and global institutional investors' strategies for engagement. Japan provides an excellent research environment for the topic. It is geographically and culturally remote from the West, and has the world's third largest economy with increasing foreign ownership on the Tokyo Stock Exchange. Under the influence of global finance, the Japanese economy has been in transition despite the persistence of its traditional institutions. There are many globally recognised Japanese firms, although certain firms have come under scrutiny in several recent corporate governance scandals. Recently, corporate reform has become one of the priority policy agendas, which has led to incremental convergence to global standards. The aims of this thesis are as follows: (i) to analyse the evolution of shareholder activism and corporate governance practices in ownership structure change (Chapter 3); (ii) to examine how global institutional investors privately engage with remote firms (Chapter 4); (iii) to explore the power of global investors in an industry with lower foreign ownership (Chapter 5); (iv) to analyse the perceptions of local firms towards global ESG standards under policy change (Chapter 6). The thesis revealed the following findings. First, global investors provide one of the only opportunities for ESG-related dialogues for local firms, in a country where local institutional investors are not active shareholders. Global finance has the power to transform local corporate governance practices by breaking down path dependence and institutional complementarities, although the status quo does persist. Second, local firms' norms and perceptions based on the existing institutions are culturally derived informal constraints, which slow down the change of corporate governance practices even after instrumental change. Third, the target firms of engagement activities are home-biased and limited to a small number of large global brand firms; hence, non-target firms and industries maintain their ESG standards unless policy reform occurs. Finally, local firms' unfamiliarity with engagement activities limits the power of global finance in a remote market. There is a gap between global institutional investors' motivation for engagement and Japanese firms' readiness to respond; hence, considered strategies and modes of communication are critical for effective engagement with remote firms, especially when language and organisational issues are present.