The aim of this thesis is to further investigate new empirical methods, results and implications on major topics relating to foreign exchange and interest rate markets. To this end, this thesis is organised in three chapters. The first chapter focuses on nominal exchange rates. It extends the literature of foreign exchange unbiasedness by including information from different derivatives markets. For the purpose of this thesis, it also implicitly provides a lead on the behaviour of interest rate differentials. The second chapter uses innovative econometric methodologies to add new insights in the behaviour of real exchange rates. Finally, Chapter Three explicitly models the international linkages between the interest rate differentials across countries with clear monetary policy implications. More specifically, a large empirical literature has tested the unbiasedness hypothesis in the foreign exchange market using forward exchange rates. In the first chapter we amend the conventional testing framework to exploit the information in currency options, using a newly constructed data set for three major dollar exchange rates. The main results are that: (i) tests based on stationary regressions suggest that options provide biased predictions of the future spot exchange rate; (ii) cointegration-based tests that are robust to several statistical problems afflicting stationary regressions and allow for endogeneity issues arising from a potential omitted risk premium term are supportive of unbiasedness. In the second chapter we test for mean reversion in real exchange rates using a recently developed unit root test for non-normal processes based on quantile autoregression inference in semi-parametric and non-parametric settings. The quantile regression approach allows us to directly capture the impact of different magnitudes of shocks that hit the real exchange rate, conditional on its past history, and can detect asymmetric, dynamic adjustment of the real exchange rate towards its long run equilibrium. Our results suggest that large shocks tend to induce strong mean reverting tendencies in the exchange rate, with half lives less than one year in the extreme quantiles. Mean reversion is faster when large shocks originate at points of large real exchange rate deviations from the long run equilibrium. However, in the absence of shocks no mean reversion is observed. Finally, we report asymmetries in the dynamic adjustment of the RER. Finally, in the third chapter we employ dynamic factor modelling and maximum likelihood estimation to investigate the existence, the patterns and the implications of common fluctuations in the money market rate differentials of a group of countries visa-vis the US or Germany. To the extent that money market rates reflect monetary policy decisions we argue that the resulting global factor represents the common part of monetary policy deviations across countries. We find that a significant part of such policy deviations is shared across countries and in fact is mainly driven by the policy interactions of the EU and the US. In particular, the US interest rate seems to emerge as a potential global interest rate. The implication is that policy makers should pay closer attention to foreign policies when setting domestic ones.
| Identifer | oai:union.ndltd.org:bl.uk/oai:ethos.bl.uk:601498 |
| Date | January 2007 |
| Creators | Nikolaou, Kleopatra |
| Publisher | University of Warwick |
| Source Sets | Ethos UK |
| Detected Language | English |
| Type | Electronic Thesis or Dissertation |
| Source | http://wrap.warwick.ac.uk/61950/ |
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