Three Essays in Financial Economics

This thesis consists of three empirical essays in financial economics, with particular focus on the European Union and the Eurozone. The thesis investigates topics related to market liquidity and integration. In particular, it covers the transmission of liquidity shocks across Eurozone markets, the role of market liquidity in the repurchase programme and integration of Eurozone economies in terms of welfare gains from trade. Liquidity and integration have received considerable attention in recent years, particularly within the context of global financial and macroeconomic uncertainty over the last decade. In the first empirical essay, we investigate static and dynamic liquidity spillovers across the Eurozone stock markets. Using a generalised vector autoregressive (VAR) model, we introduce a new measure of liquidity spillovers. We find strong evidence of interconnection across countries. We also test the existence of liquidity contagion using a dynamic version of our static spillover index. Our results indicate that the transmission of shocks increases during periods of higher financial turbulence. Moreover, we find that core economies tend to be dominant transmitters of shocks, rather than absorber. The second essay investigates the role played by market liquidity in the execution of open-market share repurchases in the UK which is the most active market within the EU for this payout method. Using a unique hand collected data set from Bloomberg Professionals, we find that the execution of share repurchases does not depend on the long-term underlying motive, but it rather relies on market liquidity and other macroeconomic variables. We also provide a methodological contribution using censored quantile regression (CQR), which overcomes most of the econometric limitations of the Tobit models, widely employed previously within this literature. The third essay quantifies the welfare gains from trade for the Eurozone countries. We apply a trade model that allows us to estimate the increase in real consumption as a result of trade between countries. We estimate welfare gains using two sufficient aggregate statistics. These are the share of expenditure on domestic goods and the elasticity of exports with respect to trade cost. We offer a methodological contribution for the estimation of elasticities by applying the Poisson pseudo-maximum likelihood (PPML) using a gravity model. PPML allows the estimation of gravity models in their exponential form, allowing the inclusion of zero trade flows and controlling for heteroskedasticity. Previous studies present several econometric limitations as a result of estimating gravity models in their log-linearised form. Our results indicate that joining the euro did not significantly increase trade gains for member countries. Nevertheless, differences across countries are significant and Northern economies experience a higher increase in welfare gains trade as compared to Southern economies

Unconditional quantile regression analysis of UK inbound tourist expenditures

YesUsing International Passenger Survey (2017) data, this paper employs unconditional quantile regression (UQR) to analyse the determinants of tourist expenditure amongst inbound tourists to the United Kingdom. UQR allows us to estimate heterogeneous effects at any quantile of the distribution of the dependent variable. It overcomes the econometric limitations of ordinary least squares and quantile regression based estimates typically used to investigate tourism expenditures. However, our results reveal that the effects of our explanatory variables change across the distribution of tourist expenditure. This has important implications for those tasked with devising policies to enhance the UK’s tourist flows and expenditures

Pricing of time-varying illiquidity within the Eurozone: Evidence using a Markov switching liquidity-adjusted capital asset pricing model

This paper investigates time-varying characteristics of illiquidity and the pricing of its risk using a liquidity-adjusted capital asset pricing model (L-CAPM). Collecting data from a pool of Eurozone countries between 1990 and 2018, we employ Markov switching models to assess the degree of persistence of illiquidity shocks. Contrary to prior research, which largely makes use of autoregressive (AR) processes, we provide strong evidence that illiquidity is time-varying and the persistence of shocks determines two distinct regimes characterised by high and low illiquidity. We assess pricing of illiquidity risk by developing and empirically testing a conditional L-CAPM model, where different regimes constitute priced risk factors for the cross-section of stock returns. We extend previous unconditional versions of L-CAPM models and we show that the various channels through which illiquidity affects asset returns and price of risks are time-varying. We find strong support for our conditional L-CAPM and our results are robust to alternative specifications and estimation techniques. These findings have important implications for portfolio management practices and are relevant to portfolio and risk managers and regulatory institutions