Three pieces of applied research on fnancial market comovements

Abstract

The dramatic development of the financial system and instruments and the phenomenonthat is generally described as the globalization trend seem to lead to more integrated global financial markets. On the one hand, this is considered an essential component of improvingboth the operational and informational eciency of finnancial markets. On the other hand,however, local shocks may well end up having far-reaching consequences especially whenthey generated in a major financial market. These two effects are at the heart of this work.In the mainstream literature, financial market integration is often captured through theprice comovements. The first chapter of this Thesis specifies correlations conditionally on adynamic structure that also involves breaks based on which it examines the comovementsbetween the foreign exchange and stock exchange markets by making the distinction betweendeveloping and developed economies. Based on a comprehensive and long sample ofboth developed and developing stock and foreign exchange markets, it reports findings thatsuggest the presence of large negative comovements between the two markets across theglobe and particularly amongst the markets of the developed economies during the recent financial turmoil.A relevant albeit very recent strand of the literature looks at financial market integrationin terms of connectedness. The second chapter of this Thesis expands the notion to capturevolatility connectedness amongst a comprehensive and long sample of stock markets usingwell-established measures of network analysis based on which it examines whether insteadof a growing degree of integration there is actually a natural level of connectedness. The findings suggest that during the episode of interruptive events such as financial crisis, politicalevents and terrorist attacks, the connectedness intensifies; but only for the stock marketof developed economies and, most importantly, for only a short period of time.Finally, the third chapter of this Thesis investigates the impact of stock market volatilityon foreign exchange returns. It was found that volatility changes were significant factorsand the risk premium tended to be positive.