Three essays on international financial markets




Zhao, Lin

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My dissertation investigates three issues in international financial markets. It contains three chapters.

Chapter one investigates the lead-lag relationship and information flows between the carry trade market and the U.S. stock market over a long time period. Unlike prior literature, we use U.S. stock price as an endogenous variable in a vector autoregressive (VAR) system, rather than an exogenous risk factor. We find that carry trade and stock returns are highly correlated, exhibit no Granger-causality in either direction, yet exhibit significant volatility spillver from the stock market to the carry trade market. The significant volatility spillover is mainly driven by cyclical stocks.

Chapter two examines the relationship between two commodity and currency price pairs using high frequency data: gold/Australian dollar and oil/Canadian dollar. Prior studies using lower frequency data do not reach conclusive results regarding commodity-currency relations. While we do not find cross-asset Granger causality in returns in either direction at 15-minute interval, I do find bidirectional volatility spillovers between commodity and currency markets. Our results are consistent with market efficiency during short horizons and contribute to the literature by finding bidirectional cross-market linkage in volatility between commodity and currency markets at intraday frequencies.

Chapter three explores the role of Chinese futures markets in setting the prices of commodity futures in the global context and their price linkages with major foreign futures markets. We find that the daytime (overnight) price changes of the foreign markets, such as the US or UK, are closely linked with the contemporaneous overnight (daytime) price changes of the Chinese markets. Causality tests with daytime returns and daily returns both suggest insignificant lead-lag relationship between the Chinese and foreign markets for most futures in the sample. These results indicate that the Chinese commodity futures markets are information-efficient and are likely to be driven by dynamics occurring during the daytime trading session of local markets.


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