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.
| Identifer | oai:union.ndltd.org:LACETR/oai:collectionscanada.gc.ca:QMM.85189 |
| Date | January 2005 |
| Creators | Mazzotta, Stefano |
| Publisher | McGill University |
| Source Sets | Library and Archives Canada ETDs Repository / Centre d'archives des thèses électroniques de Bibliothèque et Archives Canada |
| Language | English |
| Detected Language | English |
| Type | Electronic Thesis or Dissertation |
| Format | application/pdf |
| Coverage | Doctor of Philosophy (Faculty of Management.) |
| Rights | All items in eScholarship@McGill are protected by copyright with all rights reserved unless otherwise indicated. |
| Relation | alephsysno: 002227411, proquestno: AAINR12906, Theses scanned by UMI/ProQuest. |
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