Essays in international capital markets
MetadataShow full item record
My dissertation consists of three essays in international capital markets. In Chapter I, we examine the herd trading behavior of institutional investors trading around the world. Using a new transaction-level trades database of 531 U.S. institutional investors trading across 37 countries for the period 2002-2009, we find robust evidence of intra- and inter-period herdings at the monthly frequency. We find no evidence that trades by institutions in our sample destabilize local stock markets. Further analysis shows that: (i) in the buy side, both intra- and inter-period herdings are more pronounced in countries with weaker information environments; and (ii) in the sell side, intra-period herding is more pronounced in countries with stronger information environments, whereas inter-period herding is not significantly related to information environments. In Chapter II, we document that the degree of co-movement between bilateral USD ex- change rates has increased substantially since the introduction of the euro in 1999 and investigate what drives the increased co-movement. For each of our 33 sampled bilateral USD exchange rates, we measure the degree of co-movement using the R-square from re- gressing weekly exchange rate changes on the weekly world exchange rate factor. Our results show that, for the majority of sample exchange rates, the R-square has increased substan- tially over the period 1999-2010. Specifically, the average R-square was 0.15 in 1999, but it increased to 0.47 by more than 200% in 2010. Further analysis reveals that the rising influence of the euro relative to USD over a third currency can explain most of the increase in the measured co-movement over time. In Chapter III, we examine the level and trend of U.S. domestic market integration. For each of our sample states, we construct the state (market) portfolio comprising public firms headquartered within the state and compute R-square, our measure of integration, from regressing state portfolio returns on national stock market factors. Using weekly returns, we estimate the regression for each year of our sample period 1963-2008. The key findings are: (i) For the majority of sample states, the R-square exhibits a statistically significant upward trend, implying that U.S. domestic stock markets were not fully integrated and have been integrating during the sample period; (ii) consistent with the previous result, the explanatory power of the state factor over individual stock returns has been decreasing for the majority of states; and (iii) the increasing integration of U.S. domestic stock markets is associated with the decreasing home state bias, suggesting that investors' pursuit of nation- wide investment opportunities may be a significant driver of domestic financial integration.