Essays on Volatility Drivers, Transmissions and Equity Market Correlations in a Global Setting

Authors

Antonio M. Figueiredo, Florida International UniversityFollow

Document Type

Dissertation

Degree

Doctor of Philosophy (PhD)

Major/Program

Finance

First Advisor's Name

Ali M. Parhizgari

First Advisor's Committee Title

Committee Chair

Second Advisor's Name

Krishnan Dandapani

Second Advisor's Committee Title

Committee Member

Third Advisor's Name

Brice V. Dupoyet

Third Advisor's Committee Title

Committee Member

Fourth Advisor's Name

Clark M. Wheatley

Fourth Advisor's Committee Title

Committee Member

Keywords

Volatility, Correlation, Equity, Foreign exchange, Accrual, Spreads

Date of Defense

5-25-2016

Abstract

Volatility is a fascinating and important topic for financial markets in general, and probably the single most important issue in financial risk management. Although volatility itself is not synonymous with risk, it is closely associated with it in the realm of risk management. In this study, I focus on the volatility in the foreign exchange markets and investigate the spillover of volatility from this market to equity correlations and its impact on global equity markets’ bid-ask spreads as a proxy for market quality. I also explore the role that accounting earnings quality play in subsequent volatility in U.S. equity markets.

I provide a theoretical base and its associated empirics for the link between exchange rate volatilities and global equity correlations. I test this theory using multiple techniques that ends with the application of autoregressive error correction analysis, wherein, I demonstrate the predictive power of options implied exchange rate volatilities against ex-ante global equity correlations. My findings indicate that exchange rate implied volatilities, coupled with one-period ex-post correlations, are more predictive of subsequent equity market correlations than other models.

I then examine the impact of currency volatilities on the average monthly spreads in ADRs and their underlying local shares. I employ dynamic panel data estimation and principal component analysis to show that currency volatility explains a significant portion (16.6%) of the variation in spreads across markets, heretofore largely unexplored by extant finance literature.

Finally, I employ well established accrual measures to calculate aggregate accruals for the S&P 500 on a quarterly basis and examine the ability of this aggregate measure to forecast future trends in the volatility of the index. I find a statistically significant relation between subsequent twelve-month volatility in the S&P 500 index and aggregate accruals. This relation holds whether total or abnormal accruals measures are employed. My findings document a rare long-term indicator of volatility in the widely followed index. I also show that my aggregate accrual measure yields additional information about S&P 500 volatility when compared with simple historical volatility measures or option implied volatility.

Identifier

FIDC000709

Recommended Citation

Figueiredo, Antonio M., "Essays on Volatility Drivers, Transmissions and Equity Market Correlations in a Global Setting" (2016). FIU Electronic Theses and Dissertations. 2617.
https://digitalcommons.fiu.edu/etd/2617