Examining exchange rate return factors before and after the Lehman bankruptcy

Abstract

This thesis examines exchange rate return factors of holding USD before and after Lehman Brothers Bankruptcy on September 15th 2008, by analysing the relationship with multiple regressions and correlation to trace any significant influence by applying the framework provided by the Arbitrage Pricing Theory, spearheaded by Chen, Roll and Ross, 1986. Thus, regressions on the exchange rate return were computed on the historical macroeconomic data. Factors were compared 2004 – 2012 and pre/post the financial crisis, delimited by Lehman. Notably, only regressions combining several factors yielded significant results in explaining the return’s factors. Individual factor significances were found to vary notably before and after the financial crisis – displaying that the market had changed post Lehman. Remarkably, the Dow Jones Industrial Average index transitioned from a negative factor before Lehman, to an influential positive factor, notably stronger than inflation, which was the only positive factor before Lehman. Thereto, the relationship between oil, gold and the return was evaluated thru correlation, indexation and cross-rates modelling, which yielded findings of flight to safety into Gold in the market post Lehman, consistent with the sayings of Baele, Bekaert, Inghelbrecht and Wie, 2012