Three essays on financial economics

This dissertation is devoted to three essays on international finance. International financial theories are complex extensions of domestic financial theories in the sense that they take into account exchange rate fluctuations, market structures, country differences and broader international risk factors on asset valuations.; Chapter one focuses on the integration versus segmentation hypothesis of the international financial markets. Using Stehle's (1977) Capital Asset Pricing Model (CAPM), I study the East Asian (EA) region's financial markets exclusively. I examine weekly stock data of 1,300 firms from 8 EA countries over 3 sub-periods: the pre-crisis period (1995--1996), the crisis period (1997--1998) and the post-crisis period (1999--2001). Using a Nonlinear Seemingly Unrelated Regressions (NLSUR) method, I find that EA markets tended to be segmented during the crisis and moved toward being more integrated thereafter. By examining the effects of shocks on asset prices, this chapter provides an alternative perspective to regional policies, such as the Optimal Currency Area issue.; Chapter two extends Stehle's framework to a three-factor model taking into account industry factors as well as country factors and an international common factor. Using the new framework, industry systematic risks of 25 industries are tested. Results show that industries with strong natural linkages and intra-industry trade linkages tend to have significant industry risk factors. Moreover, industry factors become more important and country factors become less important during the post-crisis period than during the crisis period, implying greater economic integration and new portfolio diversification strategy.; Chapter three extends the numeraire portfolio method to the international setting. The numeraire portfolio is a new concept that allows for a simple derivation of financial models, especially in continuous time. I derive a real-term numeraire portfolio and apply it to three main international pricing models: the international CAPM (Adler and Dumas, 1983), international APT (Solnik, 1983), and international inter-temporal CAPM (IICAPM) (Hodrick, 1981). The application of the numeraire portfolio in this chapter provides a convenient link between modern martingale pricing and traditional asset pricing models in complex international markets.