Date of Degree

2-2017

Document Type

Dissertation

Degree Name

Ph.D.

Program

Economics

Advisor

Merih Uctum

Committee Members

Wim Vijverberg

Thom Thurston

Yochanan Shachmurove

Subject Categories

Finance | International Economics | Macroeconomics

Keywords

financial markets, financial crisis, law of one price, exchange rates

Abstract

Essay 1: The theory of the Law of One Price (LOOP) is one of the most important theories in International Economics. I use financial markets to revisit the validity of the LOOP in the short run, and then extend the analysis into the long-run to examine whether events such as the Financial Crisis of 2007-2009 can lead to the failure of the LOOP or worsen deviations from it. Using the data on Canadian companies cross-listed on the New York Stock Exchange, I find strong support that the LOOP holds in a cross-sectional framework despite the fact that the sample includes a highly volatile period. This is in contrast to the consensus in the literature that the LOOP is observed as a long-term phenomenon. However, in the long run the relative Law of One Price holds for only a third of the stocks individually. Moreover, it fails when the aggregate portfolio is considered, creating a major contradiction to the cross-sectional results. Another finding is that the Financial Crisis of 2007-2009 had a significant and persistent effect by increasing the deviations from the law.

Essay 2: This paper studies effects of the shocks to an exchange rate on the behavior of prices of cross-listed shares during the financial crisis of 2008. Using a sample of Canadian firms listed on the Toronto Stock Exchange (TSX) and New York Stock Exchange (NYSE), I test the validity of the LOOP and estimate the speed at which the difference between the prices on the markets reverts to the equilibrium, i.e. the $C/$US exchange rate. Findings include: a) Despite the financial crisis, the relative prices and the exchange rate are cointegrated, and the LOOP holds as a long run relationship; b) the adjustment to an exchange rate shock is faster relative to other findings in literature; c) measures of prevalent geographical trading location and relative liquidity show importance of both, home and foreign markets, in restoring the equilibrium during the crisis.

Essay 3: This paper investigates the role that the local and foreign macroeconomic news announcements and surprises play in the dynamics of the convergence to the law of one price during the recent financial crisis. We use Canadian companies listed on the Toronto Stock Exchange (TSX) and the New York Stock Exchange (NYSE), and employ a vector error-correction model that incorporates a large panel of both Canadian and U.S. news releases. We find that regardless of the specification, both announcements and surprises in macroeconomic indicators increase the speed of convergence to the law of one price and half-life by 3% and 15%, respectively. Furthermore, we investigate the cross-sectional dispersion in the reaction of stocks to news releases and find that liquidity, listing duration, and industry dummies are significant factors determining reaction of stocks to different type of news.

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