Essays on international finance---challenges from globalization

Economic and financial globalization has brought substantial benefits to countries around the world. But these benefits do not come without risks. This requires all market participates to gain a better understanding of the market in the context of globalization. This dissertation thus investigates some issues that relate to the recent developments in the international financial market.;A dominant feature of the world economy in recent year is the gowth and magnitude of current account imbalances. One explanation of divergent current account balances is the high national saving rates of the Emerging Market countries of Asia, which is also a key factor for explaining some puzzles related to abundant global liquidity, such as low bond yields and low real interest rates. In the first chapter, I try to find a new factor that helps explain high saving rates and large current account surpluses for these countries. In the model I point out that growth related structural change can affect savings through wages and the reallocation of labor. Using sector level data, I find strong empirical evidence in support of my argument. This provides another way to understand the recent "savings glut" in East Asian countries and also has implications for current account imbalances.;In the second chapter I investigate the sustainability of these large current account imbalances from a historical perspective. In particular, I ask whether China, the largest current account surplus country, can maintain these surpluses while continuing to achieve high GDP growth rates. I investigate the effect of country size on the distribution and duration of current account deficits over the period, 1966--2005. Excluding the US, I find that size does matter: the length of current account deficit spells is negatively related to the relative size of a country's GDP. This implies that, short of the emergence of a "new demander of last resort," high GDP growth and continued current surpluses are sustainable for China.;Another prominent feature of the world economy is the rapid development of the financial derivatives market. This can, in part, be attributed to increasing hedging needs created by financial globalization. In the last chapter, I investigate the foreign exchange futures market and ask: what is the main factor that describes the trading strategy followed by hedgers and speculators in the market, and whether some traders have information advantages over others. Using weekly data on five highly traded currencies, I find that most of the traders in this market are momentum traders: large speculators are positive-feedback traders, while hedgers are negative-feedback traders. I also find that traders' portfolio positions contain some information about future long term price changes. By applying a time varying transition probability (TVTP) Markov Switching model, I am able to incorporate the traders' net position into the prediction of monthly and quarterly price changes. I find that speculators in Canadian dollar and the Euro market have persistent prediction power. However, this result is sensitive to the choice of currencies and the model's setup.