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- W2794622010 abstract "This thesis adds to the resolution of two problems in finance and economics: i) what is macro-financial uncertainty? : How to measure it? How is it different from risk? How important is it for the financial markets? And ii) what sort of asymmetries underlie financial risk and uncertainty propagation across the global financial markets? That is, how risk and uncertainty change according to factors such as market states or market participants. In Chapter 2, which is entitled “Momentum Uncertainties”, I study the relationship between macroeconomic uncertainty and the abnormal returns of a momentum trading strategy in the stock market. I show that high levels of uncertainty in the economy impact negatively and significantly the returns of a portfolio of stocks that consist of buying past winners and selling past losers. High uncertainty reduces below zero the abnormal returns of momentum, extinguishes the Sharpe ratio of the momentum strategy, while increases the probability of momentum crashes both by increasing the skewness and the kurtosis of the momentum return distribution. Uncertainty acts as an economic regime that underlies abrupt changes over time of the returns generated by momentum strategies. In this way, I revisit a long-standing controversy in economics and finance, regarding the different nature of risk and uncertainty. I show that investment strategies such as momentum trading, which are precisely based on extrapolating immediate market past performance, seeking to predict future market trends, would likely fail when macroeconomic uncertainty is ‘high’. One pragmatic recommendation that derives from the main results of my research in this respect is not to trade momentum when uncertainty is above a certain threshold. In Chapter 3, “Measuring Uncertainty in the Stock Market”, first, I propose a new index for measuring stock market uncertainty on a daily basis (or what I refer to as financial uncertainty). The index considers the inherent differentiation between uncertainty and the common variations between the series (which I identify as risk). Recent contributions in the field have given rise to the methodological tools for performing the task using factor models. These proposals, however, have focused their attention on the use of macroeconomic variables to construct their indexes, as opposed to financial variables. Therefore, because of the low frequency of macroeconomic series, the proposals lack a desirable property of traditional proxies of uncertainty based on financial returns (such as VXO, VIX or credit-spreads): namely, practitioners and policy makers cannot trace their dynamics in real time. The second contribution of chapter 3 is to show how this financial uncertainty index can also serve as an indicator of macroeconomic uncertainty. I examine the circumstances under which my index might be thought to capture all the relevant information in the economy as a whole. I exploit the fact that information contained in hundreds, or even thousands, of economic indicators can be encapsulated by just a few prices of several stock market portfolios. Finally, I analyze the dynamic relationship between uncertainty and the series of consumption, interest rates, production and stock market prices, among others. This allows me to further our understanding of the role of (financial or macroeconomic) uncertainty, and to determine the dynamics of the economy as a whole. In chapter 4: “Uncertainty, Systemic Shocks and the Global Banking Sector: Has the Crisis Modified their Relationship?”, I explore the stability of systemic risk and uncertainty propagation among financial institutions in the global economy, and show that it has remained stable over the last decade. Additionally, I provide a new simple tool for measuring the resilience of financial institutions to these systemic shocks. My contribution to the literature in this essay is mainly the examination of the characteristics and stability of systemic risk and uncertainty, in relation to the dynamics of the banking sector stock returns. Thus, I provide evidence regarding the stability of the relationship between systemic shocks and the banks’ responses over the last decade. This sort of evidence is new to the literature and is supportive of past claims, made in the field of macroeconomics, which hold that during the global financial crisis the financial system may have faced stronger versions of traditional shocks rather than a new type of shock. In this chapter, I also undertake an empirical study of the role of equity market uncertainty, as a systemic risk factor for the banking industry. The inclusion of uncertainty as an observable factor enhances our understanding of the banking sector behavior during episodes of systemic stress in the financial markets. In chapter 5, “Currency downside risk, liquidity, and financial stability”, I analyze downside risk propagation across global currency markets and the ways in which it is related to liquidity. The traditional study of return and volatility spillovers in currency markets imposes its own symmetry on the analysis, by implicitly assuming that for any given country the situation is roughly the equivalent of facing depreciation or appreciation pressures. This assumption is at the very least controversial. In the worst-case scenario, central banks may lean against the wind when appreciation pressures emerge on the horizon, to the degree that they are willing (or politically allowed) to do so. On the other hand, their response is much more restricted when faced by an episode of depreciation. Here, in the worst case they are bound by the (frighteningly) lower limit of the FX reserves. Thus, I make two primary contributions to the literature. First, I estimate tail-spillovers between currencies in the global FX market. Notice that by definition currency crises are related to periods of depreciation (or devaluation), and not to episodes of appreciation (or revaluation). Thus, in terms of financial stability, episodes of depreciation are more significant than those of appreciation. The tail-spillover estimates can be used to construct a new financial stability index for the FX market. This index is easy to build and does not require intraday data, which constitutes an important advantage. My second contribution is that I explore whether turnover is related to risk spillovers in global currency markets. World currencies can be expected to behave differently depending on how much investors trade them and, in turn, commonality may become evident by examining the dynamic spillovers in worldwide FX markets. Chapter 6 is entitled “Spillovers from the United States to Latin American and G7 Stock Markets: A VAR-Quantile Analysis”. This essay contributes to the studies of contagion, market integration and cross-border spillovers during both regular and crisis episodes by carrying out a multivariate quantile analysis. I focus the analysis carried out in this chapter on Latin American stock markets, which have been characterized by a highly positive dynamic in recent decades, in terms of market capitalization and liquidity ratios, after a far-reaching process of market liberalization and reforms to pension funds across the continent during the 80s and 90s. In general I documented smaller dependences between the LA markets and the US market than those between the US and the developed economies, especially in the highest and lowest quantiles. Nevertheless, I found an asymmetrical response to the shocks originating in the US market, depending on the conditioning quantile analyzed. This result holds regardless of whether the market under consideration is mature or emerging, an outcome that can be attributed to the phenomenon of flight-to-quality operating in the lowest quantiles, and a situation of liquidity spillovers between the markets in the highest quantiles. These results have obvious implications in terms of the optimal implementation of hedging strategies, portfolio diversification, and risk management, but also with regards to the optimal design of monetary and macroprudential policies" @default.
- W2794622010 created "2018-04-06" @default.
- W2794622010 creator A5033765988 @default.
- W2794622010 creator A5050923349 @default.
- W2794622010 date "2018-02-23" @default.
- W2794622010 modified "2023-09-25" @default.
- W2794622010 title "Essays on Risk and Uncertainty in Economics and Finance" @default.
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