Estimating risk premia has been at the forefront of the financial economics' literature due to their informational content. Risk premia are of particular interest to academics, policymakers and practitioners given the information they disclose on expected asset returns for a given level of risk, their contribution in asset pricing and their ability to disentangle the different sources of risk. However, risk premia are unobserved and their estimates strongly differ from one study to another, as they are highly sensitive to the specification of the underlying model, sparking hence a strong interest in their analysis. The aim of the thesis is to estimate risk premia in a dynamic term structure model setting. The first part of the thesis comprises of an overview of a particular class of dynamic term structure models, namely affine term structure models. The overview will include important concepts and definitions. The second part of the thesis uses a risk-averse formulation of the uncovered interest rate parity to determine exchange rates through interest rate differentials, and ultimately extract currency risk premia. The method proposed consists of developing an affine Arbitrage-Free class of dynamic Nelson-Siegel term structure models (AFNS) with stochastic volatility to obtain the domestic and foreign discount rate variations, which in turn are used to derive a representation of exchange rate depreciations and risk premia. The third part of the thesis studies both the nominal and real UK term structure of interest rates using a Gaussian dynamic term structure model, which imposes the non-negativity of nominal short maturity rates. Estimates of the term premia, inflation risk premia and market-implied inflation expectations are provided.

The work presented in this dissertation can be grouped around two major themes. The first theme relates to the asset allocation and the second theme relates to risk management. In Chapter Three, we investigate the dynamics of foreign exchange and stock returns based on an extended version of Sentana and Wadhwani (1992) model. This study is mainly driven by the wish to explain two major stylized facts that puzzled the older models. We find evidence to support that only intertemporal variation in the foreign exchange risk premium can be explained by time¡Vvarying covariance priced risk factors. Furthermore, we also find that the first order autocorrelation of both foreign exchange and stock market returns in Taiwan is negatively related to the level of conditional volatility and covariance. This time-varying nature of the serial correlation pattern is consistent with our model where some traders follow feedback strategies. The three nested asset pricing models with four models of conditional second moments are strongly rejected. We conclude that our extended Sentana and Wadhwani model is more adequate in explaining the dynamics of foreign exchange and stock markets. In Chapter Four, we investigate the risk management of futures market and spot market returns. There is widespread evidence that the volatility of stock returns display an asymmetric response to good and bad news. This paper attempted and found the asymmetric behavior co-existence in spot as well as future markets. By using the Asymmetric Dynamic Model (ADC) proposed by Kroner and Ng (1998), we estimated the conditional covariance matrix asymmetric and calculated dynamic optimal hedge ratios. With the help of that asymmetric model, our ¡§out of sample¡¨ dynamic hedging strategy out-performed that of normally dynamic hedging strategies. However, while taking the transaction costs into consideration, the performance was even worse than that of the static strategy.

Purpose: The purpose of this study is to examine the bi-directional causality between political uncertainty and the market risk premium in the US. Design/methodology/approach: I use a theoretical model to motivate signs and then check signs based on a vector autoregression. Findings: I find that political uncertainty has a small positive, delayed effect on the market risk premium. The market risk premium, on the other hand, has a large permanent, negative effect on political uncertainty. Originality/value: This is the first research paper to consider the bi-directional effects of political uncertainty on the market risk premium and vice versa. It also finds interesting empirical results.

No description available.

I propose a global risk factor – Currency Traded Risk (CTR). This risk factor is the first to identify the directional link between currencies and equities. CTR captures the genesis of financial globalization, and contains the greatest predictive ability to date for monthly returns on a global stock portfolio. Theoretically, return expectation is intimately linked to time-varying risk premia. Due to the intrinsic scope of currency values in integrating the world’s financial markets, information on time-varying risk premia prices into currencies at greater speed, scale, and global consensus, relative other asset classes. High interest rate currencies proxy as a risk-on asset class. Low interest rate currencies proxy as a risk-off asset class. Innovations in these currencies’ values summarize global risk premia and forecast equity market returns. CTR measures two sources of global risk premia; the difference between averaged spot returns of high interest rate currencies and low interest rate currencies, and the difference between implied and realized volatility of high interest rate currencies. Using recursive regressions, CTR predicts monthly MSCI World Index© returns out of sample, with R2’s consistent at 10% from 2008 to 2017. Currencies track global risk premia, whereas equities respond to it.

The estimation results of Brazilian risk premia are not robust in the literature. For instance, among the 133 market risk premium estimates reported on the literature, 41 are positives, 18 are negatives and the remainder are not significant. In this study, we investigate the grounds for this lack of consensus. First of all, we analyze the sensitivity of the US risk premia estimation to two relevant constraints present in the Brazilian market: the small number of assets (137 eligible stocks) and the short time-series sample available for estimation (14 years). We conclude that the second constrain, small T, has greater impact on the results. Following, we evaluate the two potential causes of problems for the risk premia estimation with small T: i) small sample bias on betas; ii) divergence between ex-post and ex-ante risk premia. Through Monte Carlo simulations, we conclude that for the T available for Brazil, the betas estimates are no longer a problem. However, it is necessary to wait until 2041 to be able to estimate ex-ante risk premia with Brazilian data. / Os resultados das estimações de prêmios de risco brasileiros não são robustos na literatura. Por exemplo, dentre 133 estimativas de prêmio de risco de mercado documentadas, 41 são positivas, 18 negativas e o restante não é significante. No presente trabalho, investigamos os motivos da falta de consenso. Primeiramente, analisamos a sensibilidade da estimação dos prêmios de risco norte-americanos a duas restrições presentes no mercado brasileiro: o baixo número de ativos (137 ações elegíveis) e a pequena quantidade de meses disponíveis para estimação (14 anos). Concluímos que a segunda restrição, T pequeno, tem maior impacto sobre os resultados. Em seguida, avaliamos as duas potenciais causas de problemas para a estimação de prêmios de risco em amostras com T pequeno: i) viés de pequenas amostras nas estimativas dos betas; e ii) divergência entre prêmio de risco ex-post e ex-ante. Através de exercícios de Monte Carlo, concluímos que para o T disponível no Brasil, a estimativa dos betas já não é mais um problema. No entanto, ainda precisamos esperar até 2041 para conseguirmos estimar corretamente os prêmios ex-ante com os dados brasileiros.

Economics

I find evidence of predictability in out-of-sample data for four risk premia using simple econometric models. Two factor return models are used, an APT model and the Wilshire Atlas. I demonstrate that investors can exploit conditioning information to manage their exposures to risk factors. The results suggest that the investment opportunities set changes in a large and an economically significant way. I show that the growth rate in money supply and trend in stock market valuations are the main drivers respectfully of the risk premia associated with the Book-to-Market and Size factors from the Wilshire model. The predictability results are mixed with respect to Business Cycle Theory. At times investors price business cycle risk while at other times they exhibit herding tendencies.

The estimation results of Brazilian risk premia are not robust in the literature. For instance, among the 133 market risk premium estimates reported on the literature, 41 are positives, 18 are negatives and the remainder are not significant. In this study, we investigate the grounds for this lack of consensus. First of all, we analyze the sensitivity of the US risk premia estimation to two relevant constraints present in the Brazilian market: the small number of assets (137 eligible stocks) and the short time-series sample available for estimation (14 years). We conclude that the second constrain, small T, has greater impact on the results. Following, we evaluate the two potential causes of problems for the risk premia estimation with small T: i) small sample bias on betas; ii) divergence between ex-post and ex-ante risk premia. Through Monte Carlo simulations, we conclude that for the T available for Brazil, the betas estimates are no longer a problem. However, it is necessary to wait until 2041 to be able to estimate ex-ante risk premia with Brazilian data. / Os resultados das estimações de prêmios de risco brasileiros não são robustos na literatura. Por exemplo, dentre 133 estimativas de prêmio de risco de mercado documentadas, 41 são positivas, 18 negativas e o restante não é significante. No presente trabalho, investigamos os motivos da falta de consenso. Primeiramente, analisamos a sensibilidade da estimação dos prêmios de risco norte-americanos a duas restrições presentes no mercado brasileiro: o baixo número de ativos (137 ações elegíveis) e a pequena quantidade de meses disponíveis para estimação (14 anos). Concluímos que a segunda restrição, T pequeno, tem maior impacto sobre os resultados. Em seguida, avaliamos as duas potenciais causas de problemas para a estimação de prêmios de risco em amostras com T pequeno: i) viés de pequenas amostras nas estimativas dos betas; e ii) divergência entre prêmio de risco ex-post e ex-ante. Através de exercícios de Monte Carlo, concluímos que para o T disponível no Brasil, a estimativa dos betas já não é mais um problema. No entanto, ainda precisamos esperar até 2041 para conseguirmos estimar corretamente os prêmios ex-ante com os dados brasileiros.

[pt] Esta tese de doutorado compõe-se de três artigos, sendo dois em finanças empíricas e um em microestrutura de mercado. O primeiro artigo estuda de que forma movimentos nas curvas de juros futuros em Reais e Dólares Americanos negociados na BM&F estariam relacionados com duas medidas de prêmio de risco cambial, uma à priori, calculada com base nas expectativas de variação cambial três meses à frente apuradas pelo Focus-BC, e outra à posteriori, calculada sobre a variação cambial efetiva realizada nos mesmos três meses. Os resultados mostram que movimentos da curva de DI parecem mais correlacionados com a variação cambial efetiva do que com as expectativas coletadas entre os agentes. O segundo artigo é uma variação do modelo de Ang e Piazzesi (2003), e investiga a contribuição do mercado de câmbio sobre o prêmio a termo na curva de juros futuros em Reais no Brasil. Usa-se uma UIP no lugar de uma Regra de Taylor para modelar a dinâmica da taxa de curto prazo, o que nos permite substituir as variáveis macro usuais de inflação e produto pela expectativa de variação cambial e prêmio de risco cambial na especificação do prêmio a termo na curva. O terceiro artigo propõe um modelo de mercado interdealer em três estágios onde o processo de revelação de informação é modelado como um sinal ruidoso e invertido de forma seqüencial nos dois estágios de negociação no mercado inter-dealer que se seguem à transação inicial. As simulações realizadas sugerem que a diversificação de risco na economia diminui quanto maior a precisão do sinal nos dois estágios. / [en] In this thesis we discuss two empirical essays in finance and one in market microstructure. The first article studies the joint dynamics of the two most liquid term structure of interest rates traded at BM&F, one in Brazilian reais and the other in US dollars, and two currency risk premia measures. One currency risk premia measure is obtained using currency expectation surveys conducted by the Central Bank of Brazil, while the other will be residual from the three month forward premium traded each day and the effective currency observed on the liquidation date three months after. Results show that the term structures will explain some of the realized currency risk premia observed three months after. We see this as an evidence in favor of information in the curves more correlated to the effective currency movement in three months than the expected devaluation. The second article proposes and extension of the framework introduced by Ang and Piazzesi (2003) to accommodate a no- arbitrage term structure model with macro factors. We replace the usual inflation and output macro factors for two currency variables, the expected currency devaluation and the currency risk premia. Results here show a better fit when compared to existing models estimated for Brazil. The third article proposes an inter-dealer market model in three stages, where disclosure of information is modeled by noisy informative signals. Simulations show that dealers better informed will play strategically to avoid revealing information and the risk-sharing in the economy will be lower when we increase the precision of the informative signals.