Essays in Empirical Asset Pricing
Creators: name: McKinnon, Kate
Publisher: name: The Australian National University
Year: 2020

description: This thesis is a collection of three self-contained chapters applying empirical methods to explore international asset return comovement, the nature of cross-asset market spillovers, and the drivers of asset prices. The first chapter explores the extent of bidirectional linkages between currency returns and country-specific commodity price index returns for a set of large commodity exporting countries comprising Australia, Canada and New Zealand. Results show that a large portion of variation in both currency and commodity price returns is driven by shocks that are common across all markets and countries. For each category of returns, market specific shocks are also important. The results do not show evidence of significant cross-market impacts in either direction. However, when the model of currency and commodity returns is extended to include the countries' equity markets feedback between all three markets become apparent. The results provide evidence of spillovers from the commodity market to the currency returns, which supports the classification of the exchange rates of these countries as `commodity currencies'. These spillovers became more prevalent since the onset of the mid 2000s resource boom. Spillovers from the currency market to commodity prices have a relatively small but significant impact, suggesting the countries have may some degree of market pricing power on a collective basis. Spillovers from the equity market to the Australian and Canadian exchange rate returns and to Australian and Canadian commodity returns are relatively large, though there is evidence that this channel has diminished over time. The magnitude of the commodity market spillover to the equity returns of the three countries grows over time. The currency market spillover to the equity market is significant but relatively small. The second chapter explores how the interaction between commodity, currency and equity market differs for countries classified as significant commodity exporters compared to a sample of OECD counterparts by examining both the size and direction of cross-market spillovers. There has been a large amount of research characterising the relationship between currency and equity returns. A relatively recent proposition focuses on linkages forged by the behaviour of optimising international investors; specifically predicting that currency and equity returns correlations are negative due to portfolio rebalancing activities. Previous empirical evidence appearing to support this mechanism has not been extended to large commodity exporting countries and it is suggested the interruption may be due to the impact of the commodity market on the equity -- currency return relationship. However, the results obtained do not support the portfolio rebalancing mechanism for either group of countries. In addition, the results suggest that there are large spillover effects from the commodity market to the currency and equity markets of the group of other OECD countries as well as the group of large commodity exporters. The third chapter examines the determinants of currency, equity, bond and house price returns across a set of 9 OECD countries. The results show that there is a significant component in asset return volatility that is common across countries and asset markets. Bond and equity markets are found to be especially connected internationally. The impact of policy variables, per capita consumption, labour productivity, commodity prices and macroeconomic sentiment on asset prices is assessed in order to draw inferences about the variables that drive cross-country asset market connections. Results demonstrate that commonalities in productivity growth, changes in consumer and business sentiment and fiscal policy variables across countries are important channels of international asset price linkages. Commodity price movements appear to play a role in generating asset market linkages within countries.