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Essays in international finance : risk, jumps and diversification

Abstract : This thesis consists of an introductory chapter and three empirical studies that contribute to the international finance literature by investigating the dynamics of cojumps between major equity markets and assessing their impact on international portfolio allocation and asset pricing. The first study aims to examine the impact of cojumps between international stock markets on asset holdings and portfolio diversification benefits. Using intraday index-based data for exchange-traded funds (SPY, EFA and EEM) as proxies for international equity markets, we document evidence of significant intraday cojumps, with the intensity increasing during the global financial crisis of 2008-2009. The application of the Hawkes process also shows that jumps propagate from the US and other developed markets to emerging markets. However, the evidence of jump spillover from emerging markets to developed markets is weak. To assess the impact of cojumps on international asset holdings, we consider a representative American investor who allocates his wealth among one domestic risky asset, the SPY fund, and two foreign risky assets, the EFA and EEM funds and compute the optimal portfolio composition from the US investor perspective by minimizing the portfolio's risk. We find that the demand of foreign assets is negatively correlated to jump correlation, implying that a domestic investor will invest less in foreign markets when the frequency of cojumps between domestic and foreign assets increases. In contrast, idiosyncratic jumps are found to increase the diversification benefits and foreign asset holdings in international equity portfolios.The second study tackles the issue of pricing of both continuous and jump risks in the cross-section of international stock returns. We contribute to the literature on international asset pricing by considering a general pricing framework involving six separate market risk factors. We first decompose the systematic market risk into intraday and overnight components. The intraday market risk includes both continuous and jump parts. We then consider the asymmetry and size effects of market jumps by separating the systematic jump risk into positive vs. negative and small vs. large components. Using the intraday data of a set of country exchange traded funds covering developed, emerging and frontier markets, we show that continuous and downside discontinuous risks are positively rewarded in the cross-section of expected stock returns during the pre-financial crisis period whereas the upside and large jump risks are negatively priced during the crisis and post-crisis periods.The third study examines how international equity markets respond to aggregate market jumps at price and volatility levels. Using intraday data of ten exchange-traded funds covering major developed and emerging markets and two international market volatility indices (VIX and VXEEM), we show that both price and volatility jump betas are time-varying and exhibit asymmetric effects across upside and downside market movements. Looking at the relation between future stock market returns and aggregate market price and volatility jumps, we measure the proportion of future excess returns explained by market price and volatility jumps and provide evidence of a significant predictive power that market price and volatility jumps have on future stock returns.
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Oussama M'Saddek. Essays in international finance : risk, jumps and diversification. Economics and Finance. Université Clermont Auvergne, 2018. English. ⟨NNT : 2018CLFAD009⟩. ⟨tel-02524157⟩

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