Essays on empirical asset pricing

Abstract

In this thesis we look to advance our understanding of how asset prices fluctuate and why. In the first chapter we provide an extensive survey on the time-series and cross-sectional variation in average returns on currency carry trade strategies. We then identify a research niche that examines the relation between uncertainty, as measured by survey forecasts' dispersion, and the exchange rates. Subsequently, in the second chapter we find that forecast disagreements on key macro variables -- economic activity growth, short-term interest rates and current account positions -- help explain a considerable part of the time variation in FX volatility, and even allow FX volatility forecasts.

We continue exploring the FX market in the third chapter, which studies empirically the relation between macro uncertainty shocks and the cross-section of currency excess returns. We measure uncertainty over macro variables such as current account, inflation rate, short-term interest rate, real economic growth and foreign exchange rate using the cross-sectional dispersion of market participants' expectations from two international surveys of economic forecasts. We find evidence that typical investment currencies deliver low returns whereas funding currencies offer a hedge when current account uncertainty is unexpectedly high. In contrast, uncertainty over other macro indicators displays no significant relation with the cross-section of currency excess returns. We also find that current account uncertainty subsumes the information content of foreign exchange rate volatility risk.

The forth and final chapter looks at some claims made about the price acceleration giving an informative trading signal. We built several empirical measures of acceleration and compared them to the price signals from the previous academic literature on the equity market. We do find that acceleration signal leads to the construction of the long-short (LMH) trading strategies that deliver high profits. Moreover, those profits are not explained by the state-of-the-art equity factor models. However, all of the LMH profitability and cross-sectional variation in portfolios' mean returns are reconciled once we add our $la5$ factor -- a simple reversal strategy with a one trading week lookback horizon and one month holding period -- to the off-the-shelf models. Taken together, our results cast doubt on acceleration being a separate phenomenon.