Relative Returns on Equities in Pacific Basin Countries

We examine the factors that determine the differences in ex ante returns on equities in eleven Pacific Basin countries. Our concern is whether real return differentials are primarily caused by nominal return differentials or expected changes in real exchange rates. We find that nominal return differentials account for most of the difference, which suggests that either there is not free mobility of capital between the countries of our study or that there are significant differences in the riskiness of returns across countries. We do not find a significant relationship between the size of the return differentials and the flexibility of the nominal exchange rate.

Decomposing the Persistence of International Equity Flows

The portfolio flows of institutional investors are widely known to be persistent. What is less well known, however, is the source of this persistence. One possibility is the ?informed trading hypothesis?: that persistence arises from autocorrelated trades of investors who believe they have information about value and who face an imperfectly liquid market. Another possibility is that there are asynchroneities with respect to investment decisions across funds, across investments, or both. These asynchroneities could be due to wealth effects (across investments for a single fund), investor herding (across funds for a single investment), or generalized contagion (across funds and across investments). We use daily data on institutional flows into 21 developed countries by 471 funds to measure and decompose aggregate flow persistence. We find that the informed trading hypothesis explains about 75% of total persistence, and that the remaining amount is attributable entirely to cross-fund own-country persistence. In other words, we find statistically and economically significant flow asynchroneities across funds investing in the same country. There are no meaningful asynchroneities across countries, either within a given fund, or across funds. The cross-fund flow lags we identify might result from different fund investment processes, or from some funds mimicking others? decisions. We reject the hypothesis that wealth effects explain persistence.

The Determinants of Cross-Border Equity Flows: The Geography of=20 Information

We apply a new approach to a new panel data set on bilateral=20 gross cross-border equity flows between 14 countries, 1989- 96. The model=20 integrates elements of the finance literature on portfolio composition and= =20 the international macroeconomics and asset trade literature. Gross asset=20 flows depend on market size in both source and destination country as well= =20 as trading costs, in which both information and the transaction technology= =20 play a role. Distance proxies some information costs, and other variables=20 explicitly represent information transmission, an information asymmetry=20 between domestic and foreign investors, and the efficiency of transactions.= =20 The remarkably good results have strong implications for theories of asset= =20 trade. We find that the geography of information is the main determinant of= =20 the pattern of international transactions, while there is little support in= =20 our data for diversification and =91return-chasing=92 motives for= transactions.

The Determinants Of Cross-Border Equity Flows

We apply a new approach to a new panel data set on bilateral gross cross-border equity flows between 14 countries, 1989-96. The remarkably good results have strong implications for theories of asset trade. We find that the geography of information heavily determines the pattern of international transactions. Our model integrates elements of the finance literature on portfolio composition and the international macroeconomics and asset trade literature. Gross asset flows depend on market size in both source and destination country as well as trading costs, in which both information and the transaction technology play a role. The resulting augmented 'gravity' equation has equity market capitalisation representing market size and distance proxying some informational asymmetries, as well as a variable representing openness of each economy. But other variables explicitly represent information transmission (telephone call traffic and multinational bank branches), an information asymmetry between domestic and foreign investors (degree of insider trading), and the efficiency of transactions ('financial market sophistication'). This equation accounts for almost 70% of the variance of the transaction flows. Dummy variables (adjacency, language, currency or trade bloc, and a 'major financial centre' effect) do not improve the results, nor does a variable representing destination country stock market returns. The key role of informational asymmetries is confirmed. Our information transmission variables also substantially improve standard gravity equations for trade in goods.Equity flows, cross-border portfolio investment, information asymmetries, gravity model

Essays on Empirical Monetary and Financial Economics

In chapter one, I find that currency carry trade, which is borrowing money from a low interest rate country and lending it into a high interest rate country, can generate high excess profits in both developed and emerging markets. Emerging market (EM) data are more favorable to the UIP hypothesis, but G-10 countries are the opposite. In addition, the higher interest rate differential is usually associated with the exchange rate crash of the high interest rate currency. By decomposition, we find that the profit from G-10 country carry trade is mainly from strong exchange rates, while most of the emerging markets carry trade’s profits are from the huge interest rate differential. By using quantile regression, I also find out that carry trade portfolios are exposed to multiple risk factors. Those factors are more significant at the low tail distribution of returns. Commodities prices and emerging market equities index are positively associated with next month’s carry trade return. Liquidity condition in the U.S. is negatively related to G-10 country carry trade, but not related to emerging markets. Finally, by studying Bloomberg country specific risk data, we find that better financial, economic, and political conditions in each country predict lower carry trade return, but not statistically significant. In chapter two, I study the response of asset prices to the monetary policy shock in Federal Reserve Bank. As the most important monetary policy transmission channel, the financial markets behavior around interest rate decision of the Federal Reserve of U.S. have been widely discussed by people in academia and the industrial world. This paper uses an event study of macroeconomics to examine the casual relationship of the monetary policy shock on asset prices.We find that treasury bills, exchange rates of developed countries are significantly influenced by the unexpected component of the monetary policy in U.S. from 1989 to 2008. In addition, emerging market exchange rates respond weakly to the policy surprise. We also pointed out that international equity markets and commodities prices are not sensitive to the rate decision of the Federal Reserve Bank in one day to very significant in 5 days after rate decision. The pre and post-FOMC meeting day’s Treasury bill yields also respond to the anticipated and unanticipated of the rate decisions

Comparative Study of Pair Trading Techniques in Pakistan’s Financial and Non-Financial Sector

Purpose: This study attempts to empirically investigate the pair trading performance of financial and non-financial firms in Pakistan. Methodology: Daily data from 2008 to 2017 was collected for nine years. Cointegration and the distance approach were the two major analytical techniques used to evaluate the profitability of pair trading. The financial and non-financial sectors of the Pakistan Stock Exchange were used to build the pairs. Findings: Results showed that the top 5 pairs of portfolios exhibited the highest average excess returns of 0.0698, and Jensen's alpha is 0.0947 for the top 5 pairs. All pairs of firms showed significant and positive risk-adjusted performance. In the non-financial sector, the Top 10 pairs of portfolios had the highest average excess returns of 0.0789, and Jensen's alpha under the co-integration method for non-financial firms for all pairs 5, 10, 15, and 20 of the portfolios is also substantial and positive for risk-adjusted performance, with 0.0046, 0.0618, 0.0577, and 0.0493, respectively. Finally, pair trading under both techniques showed profitability. However, the co-integration technique exhibited better performance than the distance method. Conclusion: The study concluded that both pair trading techniques, particularly the co-integration technique, exhibited profitable pair trading performance that can assist investors and fund managers to earn positive returns on their investments regardless of market direction

Research in Emerging Financial Technologies

In chapter one we investigate the price clustering of non-fiat cryptocurrency exchange rates or the pricing of items in cryptocurrency such as bitcoin, which has been accepted as payment at a growing list of companies. For litecoin, a non-fiat currency, priced in terms of satoshi, one hundred millionth of a bitcoin, over 35% are priced at 100 satoshi increments, providing support for the negotiation hypothesis. There is also strategic pricing at 1 satoshi below or above the 100 satoshi increments. At the transaction level, we find that prices are mainly formed due to negotiations and strategic trading, instead of based on psychologically appealing numbers in the order of 0, 5, and others.In the second chapter we examine commonality in returns and liquidity (trading volume) for Bitcoin-fiat currency pairs, each trading on an exchange in a country with a single time zone. We find evidence that one common factor explains about 54% of the variance in hourly trading volume. We find strong support for the presence of a microstructure-noise volatility multiplier. Volume is higher on local exchanges during local working hours, reflecting a pattern also seen in forex markets, and supporting the view that trading patterns depend on the location of trade rather than the location of the asset being traded.In the final chapter we use the distribution from Benfords Law to investigate whether fake volume is reported for five bitcoin exchanges that are either regulated by the US Department of Treasury or have licenses from the State of New York and three exchanges that are not so regulated. Using counts of first digits, counts of second digits, and sums of numbers beginning with the same first two digits, we find that the distribution of minute-level volume of regulated exchanges deviate less from Benfords expected distribution than the remaining three exchanges. We find that the proportion of first digits deviate less for the Bitstamp, Coinbase, and ItBit exchanges, justifying their use as the basis for the index price for CME Bitcoin Futures contracts (BTCA)

Which Pairs of Stocks should we Trade? Selection of Pairs for Statistical Arbitrage and Pairs Trading in Karachi Stock Exchange

Pairs Trading refers to a statistical arbitrage approach devised to take advantage from short term fluctuations simultaneously depicted by two stocks from long run equilibrium position. In this study a technique has been designed for the selection of pairs for pairs trading strategy. Engle-Granger 2-step Cointegration approach has been applied for identifying the trading pairs. The data employed in this study comprised of daily stock prices of Commercial Banks and Financial Services Sector. Restricted pairs have been formed out of highly liquid log share price series of 22 Commercial Banks and 19 Financial Services companies listed on Karachi Stock Exchange. Sample time period extended from November 2, 2009 to June 28, 2013 having total 911 observations for each share prices series incorporated in the study. Out of 231 pairs of commercial banks 25 were found cointegrated whereas 40 cointegrated pairs were identified among 156 pairs formed in Financial Services Sector. Furthermore a Cointegration relationship was estimated by regressing one stock price series on another, whereas the order of regression is accessed through Granger Causality Test. The mean reverting residual of Cointegration regression is modeled through the Vector Error Correction Model in order to assess the speed of adjustment coefficient for the statistical arbitrage opportunity. The findings of the study depict that the cointegrated stocks can be combined linearly in a long/short portfolio having stationary dynamics. Although for the given strategy profitability has not been assessed in this study yet the VECM results for residual series show significant deviations around the mean which identify the statistical arbitrage opportunity and ensure profitability of the pairs trading strategy. JEL classifications: C32, C53, G17 Keywords: Pairs Trading, Statistical Arbitrage, Engle-Granger 2-step Cointegration Approach, VECM