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Essays in financial economics

Iwadate, Muneaki Bruce (2021) Essays in financial economics. PhD thesis, London School of Economics and Political Science.

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Identification Number: 10.21953/lse.00004388


In the first chapter, I study the exchange-traded fund (ETF) market from two perspectives. First, I study its contagion, and I show that the network of the ETF market — the linkages between ETFs based on portfolio weights — catalyzes the propagation of price dislocations, the gaps between prices and their fundamental values. Arbitrage trading induces price dislocations in connected ETFs, followed by responses in returns and subsequent reversals with a sizable effect of 4-6% per year. The findings suggest that arbitragers create externalities from trading. Finally, the ETF market works as a stabilizer for price dislocations, but induced returns can incur unexpected fluctuations. Another is information embedded in ETFs. By extracting information in ETFs, I uncover the risk neutral covariance of global asset returns and currency returns to understand risk premium and exchange rate risk in the global financial market better. The measure captures some economic policy uncertainty in real time. The second chapter studies the futures markets. The literature has documented that the inflow of institutional money into the commodity market led to so-called financialization of commodities and hence the higher correlation between equity and commodity. However, the correlation is highly timevarying, and it had decreased once before it has faced another surge. I find this time-varying correlations between equity and commodity as well as between commodity and bond are driven by the net trading positions for corresponding pair of asset classes. Exploiting this, I construct the measure that signals mispricing of large investors, and I find cross-sectional predictability for future returns with this measure. I also investigate the role of the limit to arbitrage in the currency market in a relation to return spillovers from the commodity market empirically and theoretically. In the third chapter (co-authored with Raphael Auer, Andreas Schrimpf, and Alexander Wagner), we study how the international trade network can affect financial markets. In contrast to the earlier literature, our measure shows the trade flows in global value chains affect equity market comovements strongly. One standard deviation increase in our trade intensity measure leads to roughly 0.05 to 0.1 increase in correlations. Our results hold after controlling for financial integration and other factors that could affect the international asset market comovements.

Item Type: Thesis (PhD)
Additional Information: © 2021 Muneaki Bruce Iwadate
Library of Congress subject classification: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Sets: Departments > Finance
Supervisor: Lou, Dong and Julliard, Christian

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