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published_or_final_version / Statistics / Master / Master of Philosophy

This paper studies the influence on the Japanese stock (cash and futures) markets of the Nikkei put warrants which were traded in Toronto and New York from February 1989 to April 1993. Implied changes in the Japanese prices based on the previous days’ North American warrant prices are compared to the actual price changes. Special attention is placed on the period from January 1990 to August 1992 when the Japanese stock market had a major decline.

There are two key observations in international macroeconomics which pertain to output and real exchange rate dynamics. First, fluctuations in national output around its long-run growth path are very persistent. Second, fluctuations in real exchange rates are very persistent. The sticky price framework offers an explanation for both phenomena. The first and second essay of this thesis take an empirical approach to test the predictions of this framework. In the first essay I test the prediction of the sticky price model for output dynamics using annual IFS data on 51 countries over the period 1950 -1996. The model predicts that price stickiness should be less important in high inflation countries and therefore output fluctuations less persistent. I find that, this inverse relationship is statistically insignificant in the international data. A similar result holds for OECD countries. In the empirical implementation I explicitly control for the within-country time variation in inflation by first characterizing the inflationary environment using the long-run movements in inflation (trend inflation), and secondly, by excluding episodes of hyperinflation. The analysis shows that when the within-country time variation in inflation is ignored, there is support for the prediction. For instance, the inverse relationship between persistence in deviations of output from its long-run growth path and average inflation is statistically significant in the full sample. However, the exclusion of a few episodes of hyperinflation renders this relationship statistically insignificant. In the second essay I investigate the prediction of the sticky price model for real exchange rate dynamics using annual IFS data on 49 countries over the period 1972-1996. The model predicts that deviations of real exchange rates from purchasing power parity should be less persistent, in high inflation countries. The empirical analysis reveals that the support for such an inverse relationship is extremely fragile. In particular, eliminating episodes of hyperinflation renders this relationship statistically insignificant. The lack of evidence in favour of the two predictions of the sticky price model is problematic since this model is extensively used as a microfoundation for understanding output and real exchange rate fluctuations. In the third essay I take a structural approach to qualitatively explore the role of slow diffusion of new products in propagating the effect of technology shocks on output. I present a multi-sector dynamic general equilibrium model in which the creation of new products requires real resources. These products are beneficial for the economy but only upon complete diffusion. However, this diffusion is not instantaneous. I find that relative to a model in which there is instantaneous diffusion of new products, the qualitative output dynamics are similar to what is observed in the U.S. data. This warrants further quantitative investigation.

This dissertation is in the form of one survey paper and three essays on the topic of volatility. The unifying feature that permeates the entire thesis is the focus on the measurement and use of conditional second moment of equities and currencies as a measure of risk for asset pricing and policy purposes in the context of international markets. / The survey examines selected papers from the international finance literature and from the volatility literature with a focus on the theoretical and empirical relationship between first and second unconditional and conditional moments of domestic and international asset returns. It then specifically proposes several areas for investigation related to international finance topics. The first essay investigates the importance of asymmetric volatility when computing the risk premium of international assets. The results indicate that conditional second moment asymmetry is significant and time-varying. They also show that, if the price of risk is time-varying, the world market and foreign exchange risk premia estimated without allowing for time-varying asymmetry are less consistent with the data. Furthermore, they imply that asymmetry is more pronounced when the business condition is such that investors require higher compensation to bear risk. / In the second essay we start from the consideration that financial decision makers often consider the information in currency option valuations when making assessments about future exchange rates. The purpose of this essay is then to systematically assess the quality of option based volatility, interval and density forecasts. We use a unique dataset consisting of over 10 years of daily data on over-the-counter currency option prices. We find that the implied volatilities explain a large share of the variation in realized volatility. Finally, we find that wide-range interval and density forecasts are often misspecified whereas narrow-range interval forecasts are well specified. / In the third essay we examine whether the information contained in various measures of correlation among exchange rates can be used to assess future currency co-movement. We compare option-implied correlation forecasts from a dataset consisting of over 10 years of daily data on over-the-counter currency option prices to a set of return-based correlation measures and assess the relative quality of the correlation forecasts. We find that while the predictive power of implied correlation is not always superior to that of returns based correlations measures, it tends to provide the most consistent results across currencies. Predictions that use both implied and returns-based correlations generate the highest adjusted R2's, explaining up to 42 per cent of the realized correlations.

This thesis comprises three essays that explore several theoretical and empirical features of affine term structure models. In the first essay, we focus on the ability of continuous-time affine term structure models to capture time variability in the second conditional moment. Using data on US Treasury yields, we conclude that affine term structure models are much better at extracting time-series volatility from the cross-section of yields than argued in the literature. These models have nonetheless difficulty capturing volatility dynamics at the short end of the maturity spectrum, perhaps indicating some form of segmentation between long-maturity and short-maturity bonds. These results are robust to the choice of sample period, interpolation method and estimation method. In the second essay, we propose the use of the unscented Kalman filter technique for the estimation of affine term structure models using non-linear instruments. We focus on swap rates and show that the unscented Kalman filter leads to important reductions in bias and gains in precision. The use of the unscented Kalman filter results in substantial improvements in out-of-sample forecasts. Our findings suggest that the unscented Kalman filter may prove to be a good approach for a number of problems in fixed income pricing in which the relationship between the state vector and the observations is nonlinear, such as the estimation of term structure models using interest rate derivatives or coupon bonds, and the estimation of quadratic term structure models. The third essay provides a tractable framework for pricing defaultable securities with recovery risk. Pricing solutions are explored for a large family of discrete-time affine processes and a five-factor Gaussian model is estimated on BBB and B Standard and Poor's yield indices. This rich econometric setup allows the model to simultaneously capture two important stylized facts of defaultable securities: The positive correlation between the loss given default and the intensity of default, and the negative correlation between the intensity of default and the risk-free interest rate.

An event study is an economic tool of analysis that has begun to gain popularity in recent empirical literature. It is a technique that gives a researcher the opportunity to map out the reaction of a firm's stock to an event, usually making use of daily or monthly data. However, up to this point, event study methodology has generally been applied to more traditional phenomena capable of affecting equity value, such as dividend and macroeconomic policy announcements, and there have only been a few exceptions to this. This study looks at what impact the tragic shootings at Lonmin mine in Marikana on August 16th 2012 had on the share prices of platinum mining firms based in South Africa using event study methodology. It makes use of the technique to investigate how the share prices responded to the tragedy over a number of trading days, including the day of the shootings. To be best of our knowledge, no attempt has been made to analyse the impact on share prices using events of this nature. For the investigation, daily returns data was used for each firm. The abnormal returns and cumulative abnormal returns to each were then calculated and compared with their respective expected returns in order to determine whether investors in the shares of that particular firm reacted positively, negatively or not at all. The evidence found suggests that tragedies of this nature are capable of influencing share prices in the same manner as more traditional economic phenomena. Overall, only one firm was found to have been negatively affected by the shootings in a persistent manner, while the shares of the other firms examined reacted in a manner that was positive overall, but varied according to individual firm characteristics such as size. These finding conformed to our a priori expectations. In addition, the results also confirm the benefits of applying event study methodology to a wide variety of phenomena that fall outside the boundaries usually associated with business.

This paper studies the influence on the Japanese stock (cash and futures) markets of the Nikkei put warrants which were traded in Toronto and New York from February 1989 to April 1993. Implied changes in the Japanese prices based on the previous days’ North American warrant prices are compared to the actual price changes. Special attention is placed on the period from January 1990 to August 1992 when the Japanese stock market had a major decline. / Business, Sauder School of / Graduate

There are two key observations in international macroeconomics which pertain to output and real exchange rate dynamics. First, fluctuations in national output around its long-run growth path are very persistent. Second, fluctuations in real exchange rates are very persistent. The sticky price framework offers an explanation for both phenomena. The first and second essay of this thesis take an empirical approach to test the predictions of this framework. In the first essay I test the prediction of the sticky price model for output dynamics using annual IFS data on 51 countries over the period 1950 -1996. The model predicts that price stickiness should be less important in high inflation countries and therefore output fluctuations less persistent. I find that, this inverse relationship is statistically insignificant in the international data. A similar result holds for OECD countries. In the empirical implementation I explicitly control for the within-country time variation in inflation by first characterizing the inflationary environment using the long-run movements in inflation (trend inflation), and secondly, by excluding episodes of hyperinflation. The analysis shows that when the within-country time variation in inflation is ignored, there is support for the prediction. For instance, the inverse relationship between persistence in deviations of output from its long-run growth path and average inflation is statistically significant in the full sample. However, the exclusion of a few episodes of hyperinflation renders this relationship statistically insignificant. In the second essay I investigate the prediction of the sticky price model for real exchange rate dynamics using annual IFS data on 49 countries over the period 1972-1996. The model predicts that deviations of real exchange rates from purchasing power parity should be less persistent, in high inflation countries. The empirical analysis reveals that the support for such an inverse relationship is extremely fragile. In particular, eliminating episodes of hyperinflation renders this relationship statistically insignificant. The lack of evidence in favour of the two predictions of the sticky price model is problematic since this model is extensively used as a microfoundation for understanding output and real exchange rate fluctuations. In the third essay I take a structural approach to qualitatively explore the role of slow diffusion of new products in propagating the effect of technology shocks on output. I present a multi-sector dynamic general equilibrium model in which the creation of new products requires real resources. These products are beneficial for the economy but only upon complete diffusion. However, this diffusion is not instantaneous. I find that relative to a model in which there is instantaneous diffusion of new products, the qualitative output dynamics are similar to what is observed in the U.S. data. This warrants further quantitative investigation. / Arts, Faculty of / Vancouver School of Economics / Graduate