This Ph.D. thesis contains 3 essays in international finance with a focus on foreign exchange market from the perspectives of empirical asset pricing (Chapter 2 and Chapter 3), forecasting and market microstructure (Chapter 4). In Chapter 2, I derive the position-unwinding likelihood indicator for currency carry trade portfolios in the option pricing model, and show that it represents the systematic crash risk associated with global liquidity imbalances and also is able to price the cross-section of global currency, sovereign bond, and equity portfolios; I also explore the currency option-implied sovereign default risk in Merton’s framework, and link the sovereign CDS-implied credit risk premia to currency excess returns that it prices the cross section of currency carry, momentum, and volatility risk premium portfolios. In Chapter 3, I investigate the factor structure in currency market and identify three important properties of global currencies – overvalued (undervalued) currencies with respect to equilibrium exchange rates tend to be crash sensitive (insensitive) measured by copula lower tail dependence, relatively cheap (expensive) to hedge in terms of volatility risk premium, and exposed to high (low) speculative propensity gauged by skew risk premium. I further reveal that these three characteristics have rich asset pricing and asset allocation implications, e.g. striking crash-neutral and diversification benefits for portfolio optimization and risk management purposes. In Chapter 4, I examine the term structure of exchange rate predictability by return decomposition, incorporate common latent factors across a range of investment horizons into the exchange rate dynamics with a broad set of predictors, and handle both parameter uncertainty and model uncertainty. I demonstrate the time-varying term-structural effect and model disagreement effect of exchange rate determinants and the projections of predictive information over the term structure, and utilize the time-variation in the probability weighting from dynamic model averaging to identify the scapegoat drivers of customer order flows. I further comprehensively evaluate both statistical and economic significance of the model allowing for a full spectrum of currency investment management, and find that the model generates substantial performance fees.
| Identifer | oai:union.ndltd.org:bl.uk/oai:ethos.bl.uk:681840 |
| Date | January 2015 |
| Creators | Huang, Huichou |
| Publisher | University of Glasgow |
| Source Sets | Ethos UK |
| Detected Language | English |
| Type | Electronic Thesis or Dissertation |
| Source | http://theses.gla.ac.uk/6952/ |
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