Dissertations, Theses, and Capstone Projects

Date of Degree

5-2018

Document Type

Dissertation

Degree Name

Ph.D.

Program

Economics

Advisor

Merih Uctum

Committee Members

Wim Vijverberg

Sebastiano Manzan

Tao Wang

Subject Categories

Economics | International Economics

Keywords

Volatility spillover, Frequency domain causality, Risk spillover, Conditional Value-at-Risk, Time-varying copulas, Dynamic correlations, Conditional tail dependence

Abstract

This dissertation consists of three distinct but related chapters studying the behavior of international financial markets. Chapter 1 explores volatility spillovers between European equity and foreign exchange markets from 2009 until 2016. In contrast to traditional empirical methods, this study uses realized volatility estimates to analyze causal linkages across the frequency domain. Volatility spillovers are tested using the CAC 40, DAX, and FTSE 100 equity indices and the USD/GBP, USD/EUR, and GBP/EUR exchange rates. Results show that volatility spillovers are bidirectional and asymmetric across the frequency domain. Daily volatility spillover from equity to foreign exchange markets is significant at high, mid-range, and low frequencies, whereas foreign exchange to equity market spillover is significant only at lower frequencies. Weekly analysis reinforces these results. However, volatility spillover from equity to foreign exchange markets is less persistent and insignificant from the CAC 40 and DAX to the USD/EUR. These findings highlight the need to consider a wide-range of frequencies when testing for spillover effects.

Chapter 2 analyzes risk spillovers across North American equity markets from 1995 until 2016. Downside and upside Conditional Value-at-Risk (CoVaR) are estimated after modeling the dynamic dependence structure for each equity market pair using generalized autoregressive score (GAS) copulas. US-CAN and CAN-MX dynamic correlations trend upwards over the sample period while the US-CAN correlation fluctuates around a higher long-run average. Conditional tail dependence is symmetric in all cases and increases substantially following the Global Financial Crisis, reflecting greater co-movement under extreme economic conditions. Downside and upside risk spillovers are significant and asymmetric for each equity market pair, where downside risk spillovers are more severe. Risk spillover magnitude varies significantly with conditioning direction. Asymmetric behavior is observed across high/low risk and high/low risk spillover periods.

The third and final chapter investigates the dynamic dependence structure between U.S. equity market returns and fluctuations in dollar strength using generalized autoregressive score (GAS) copulas. Analysis is conducted for both large and small equity market sizes, as well on a sector-specific basis to tease out differences attributed to international exposure. Significant variation is observed in the dynamic correlations over time, where they exhibit extreme persistence but with a tendency for rapid trend reversals. Dynamic correlations are negative on average with brief positive episodes. Symmetric tail dependence is significant for ten of the twelve equity market measures considered, peaking during periods of exuberance and financial stress when correlations are positive. Sub-sector tail dependence tends to follow the broader market behavior but with large deviations in overall magnitude across time.

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