Three Essays on Financial Economics

Hanjiang Zhang

Enterprise Hall, 318
January 05, 2005, 07:00 PM to 07:00 PM


This dissertation is devoted to three essays on international finance. International financial theories are complex extensions of domestic financial theories in the sense that they take into account exchange rate fluctuations, market structures, country differences and broader international risk factors on asset valuations. Chapter one focuses on the integration versus segmentation hypothesis of the international financial markets. Using Stehle?s (1977) two-factor Capital Asset Pricing Model (CAPM), I study the East Asian (EA) region?s financial markets exclusively, which include China, Indonesia, Japan, Korea, Malaysia, Philippines, Taiwan and Thailand. I examine weekly stock data of 1,300 firms from 8 EA countries over two sub-periods: the crisis period (1997?1998) and the post-crisis period (1999?2001). Using a Nonlinear Seemingly Unrelated Regressions (NLSUR) method, I find that EA markets tended to be segmented during the crisis and moved toward being more integrated thereafter. By examining the effect of shocks on asset prices, this chapter provides an alternative perspective to regional policies, such as Optimal Currency Area (OCA). The results indicate the greater importance of regional shocks as opposed to country shocks, suggesting a stronger case for an OCA. If financial markets lie between full integration and full segmentation, securities will be exposed to both national and international risk factors. In order to provide deeper insights into the characteristics of international financial markets, Chapter two extends Stehle?s framework to a three-factor model taking into account industry factors as well as country factors and an international common factor. Using the new three-factor CAPM framework, I examine country versus industry effects in explaining security returns in EA

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