| My dissertation investigates the nature of the relationships among the key financial domains, particularly focusing on equity and foreign exchange markets. Three main issues are addressed: Modeling, Dependence and Clustering.;First, I propose to model exchange rate movements by integrating cross-market explanatory variables, such as equity indices and commodity prices (crude oil prices) with macroeconomic variables such as inflation rates and interest rates. The empirical analysis employs the vector autoregression (VAR) methodology, as well as Granger causality, cointegration, impulse response and variance decomposition tests. Examining four developed markets over the period January 1989 to October 2008, I find evidence that financial market variables, individually and jointly, outperform macroeconomic variables in determining exchange rates. I also find that the oil price variable is a strong driver of movements in the US dollar. Soaring oil prices are associated with depreciation of the US dollar against the major currencies: Euro, British pound, Japanese yen, and Canadian dollar.;Second, I investigate the dynamic relationship between exchange rates and equity return differentials. A statistically significant positive relationship has been found by employing a time-varying copula methodology for ten developed countries relative to the US. More specifically, when a foreign equity index gains a higher return than the S&P 500, the foreign currency is strengthened relative to the US dollar. A structural break (dramatic drop) in the conditional copula is observed during the 2008 global financial crisis but not in the 2001 (dot-com bubble crash) bear market I also test the asymmetric property of the dynamic dependence using the Symmetrized Joe-Clayton copula. Most evidence shows that the upper tail dependence is smaller than the lower tail dependence. This demonstrates that exchange rates and equity return differentials against the US are less dependent when the foreign currency appreciates against the US dollar and foreign equities outperform US equities, than vice versa.;Third, I examine the structure of financial systems by employing a Minimum Spanning Tree (MST) technique. More precisely, I study the equity system, the foreign exchange system, and the US multi-asset system. I explore how the MSTs evolve over the period of 2001--2008, covering two recent U.S. economic recessions. Comparing the MSTs based on different periods of time, I examine whether the market structure changes during the economic recessions. For the currency system, diverse benchmarks, such as the US dollar, Euro, Japanese yen, gold and oil, have been considered. MST distance statistics and survival ratios are computed to explore the time-varying features of the MST. The results show that the financial systems become more intergraded over time. The MST is able to identify a robust and scale free network with meaningful taxonomy, which is verified by the Principal Component Analysis (PCA) as well. |
