This thesis studies the role of global risk within the context of international finance. In total, the thesis is composed of three essays. In Chapter 2, I investigate the impact of global risk on the cross-border flows of funding between banks. Specifically, I decompose gross cross-border bank-to-bank funding between arms-length (interbank) and related (intragroup) funding, and show that while interbank funding is withdrawn when global risk is high, intragroup funding remains stable during these periods, despite being more volatile on average. The results are in contradiction with theoretical predictions for the behavior of cross-border banking fl ows, and help explain why certain banking systems lost more cross-border bank-to-bank funding than others during the global financial crisis of 2008. In Chapter 3, I turn my attention to the currency market and show that global imbalances are a fundamental economic determinant of currency risk premia. I propose a factor that captures exposure to countries' external imbalances - termed the global imbalance risk factor - and show that it explains most of the cross-sectional variation in currency excess returns. The economic intuition of this factor is simple: net foreign debtor countries offer a currency risk premium to compensate carry trade investors willing to finance negative external imbalances. Finally, in Chapter 4, I focus again on the currency market by investigating the fundamental source of variation in currency betas. Theoretical models of currency premia offer precise explanations for why currencies exhibit heterogeneous exposure (betas) to risk. Characteristic factors, constructed to reflect these 'beta predictions' of leading models of currency premia would, therefore, also be expected to explain the cross-section of currency portfolio returns. I find, however, that none of the factors can explain any of the cross-sectional spread in returns. Yet alternative non-theoretical characteristic factors, based on macroeconomic, financial and political risk, perform almost universally well in cross-sectional tests. But these factors can also be dismissed as explanations for heterogeneous currency betas, with a simple secondary test. The findings imply a need for a stricter empirical benchmark for assessing all theoretical models of currency premia. Moreover, by investigating currency betas, I show that standard empirical asset pricing techniques can filter out around 99% of spurious currency risk factors.
| Identifer | oai:union.ndltd.org:bl.uk/oai:ethos.bl.uk:618974 |
| Date | January 2014 |
| Creators | Riddiough, Steven John |
| Publisher | University of Warwick |
| Source Sets | Ethos UK |
| Detected Language | English |
| Type | Electronic Thesis or Dissertation |
| Source | http://wrap.warwick.ac.uk/63014/ |
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