Date of Award

8-2016

Document Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

Legacy Department

Economics

Committee Member

Dr. Gerald Dwyer, Committee Chair

Committee Member

Dr. Robert Tamura

Committee Member

Dr. Michael Jerzmanowski

Committee Member

Dr. Scott Baier

Abstract

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.

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