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Scheller College of Business
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ItemEssays on International Finance: Stock Market Wealth Creation, Sovereign CDS Spreads, and Currency Comovement(Georgia Institute of Technology, 2021-08-11) Jang, Ernest S.Using the wealth creation measure developed by Bessembinder (2018), we estimate stock market wealth creation around the world and show the importance of national culture in explaining wealth creation. The 88 stock markets in our sample create $76.6 trillion net wealth from 1973 to 2019, with the U.S. contributing the most (52.5%). Among industries, finance creates the most wealth (17.6%). We find that countries with individualistic, less masculine, and less uncertainty avoidant cultures have comparative advantages in stock market wealth creation. We also show that culture influences wealth creation through multiple channels, such as innovation, governance, information, education, and sustainability. In this paper, we first document that the degree of co-movement of currencies varies a great deal across different base (measurement) currencies. In estimating the co-movement, we use the average of R2s from regressions of exchange rate changes of each of our 27 floating-rate sample currencies against the base currency on the currency market factor. Over our sample period 1999–2018, the average R2 is found to range from 22.1% for the Singapore dollar to 71.8% for the South African rand, with the average of 51.5% across sample base currencies. This implies that the extent to which the currency risk is diversifiable critically depends on the investor’s home currency; for instance, the currency risk would be highly diversifiable for Singapore dollar-based investors but largely systematic for South African rand-based investors. Motivated by our novel currency clustering analysis utilizing a base-currency independent metric, we then set forth and provide strong evidence supporting the hypothesis that the idiosyncratic (connected) currencies influenced weakly (strongly) by the major global currencies, i.e., the U.S. dollar and the euro, face high (low) degrees of co-movements of other currencies This paper analyzes the impact of the Federal funds rate surprises on the sovereign CDS spreads of 83 countries by using 138 FOMC announcements from 2002 to 2018. We document that sovereign CDS spreads tend to increase on the day after the announcements of unexpected reduction in federal fund rates. On average, a hypothetical 100 basis point negative Federal funds target rate shock is associated with about seven basis points increase in sovereign CDS spreads on the day after the FOMC announcement. We also find that the impact of Federal funds rate shock on sovereign CDS spread varies depending on macroeconomic conditions. Specifically, the impact is more pronounced for countries with higher external debts, lower foreign reserves, higher proportions of primary commodities in their exports, heavier dependency on the U.S. economy, and lower exchange rate volatility against U.S. dollar. We also find that countries with higher than median CDS spread mainly drive these results. Our findings in this paper suggest that U.S. monetary policy shock is an important determinant of the sovereign credit spread.
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ItemNETWORK ANALYSIS OF STOCK MARKETS(Georgia Institute of Technology, 2020-06-22) Wei, FengrongThis dissertation consists of three essays on the application of network methods in finance study at the country-level, firm-level, and fund-level. In the first essay, we extend the analysis of globalization from the market factor to the rest of Fama-French factors and the Carhart momentum factor. The findings show that most of the sample local factors are significantly globalized, with the degree of globalization varying substantially across factors. Specifically, the market factor is the most globalized factor on average, followed by the momentum, size, value, profitability, and investment factors. In addition, we show that the impact of financial globalization has been imputed in the local factors, which explains the intriguing finding of integrated international asset pricing. That is, the local Fama-French factors outperform the global counterparts in pricing stocks, seemingly suggesting that stocks are priced as if financial markets were segmented despite the evident globalization. Our results indicate that this puzzle is attributable to the globalization of local factors. In the second essay, we propose a system-wide approach to the study of the firm-specific connections, which capture the distinct relatedness between firms through unique features, conditional on the U.S. market. The proposed approach provides a new system-wide and factor-free measurement of market integration. We find that the degree of the firm-specific connections has decreased over time, and industry and style attributes significantly positively affect these connections. By applying these connections, investors can consistently gain through holding relatively few stocks randomly chosen across communities clustered based on these connections. Moreover, this consistency of gains has increased substantially over time, pointing to the importance of considering the firm-specific connections in risk diversification. In the third essay, we use holding-linked network of mutual funds, measured by the similarity between funds' portfolios, to examine the network predictability of fund performance and flows. Using the new network method, we find evidence of significant predictability between funds with similar holdings. The predictability persists three to six months for alternative performance measures and at least twelve months for fund flows. In addition, a long-short strategy based on these holding links yields a significant annual alpha of about 4.5%. These findings reflect the similar underlying drivers of funds' portfolio holdings and show the persistent prediction of fund performance and flows by the holding linked network.