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Essays in high-frequency empirical finance and risk management

by Ebrahim, Shafiq K.

Abstract (Summary)
This thesis uses intradaily data on financial asset prices to test the weakform market efficiency hypothesis as well as to analyze high-frequency relationships between assets that trade in related financial markets. Linkages between financial markets are aiso investigated at a lower frequency in an empirical study of investor behavior during periods of increased aggregate risk. First, the thesis examines the profitability of two types of technical trading rules-moving average rules and the Relative Strength Index (RSI) oscillator-when applied to spot exchange rates at both the intradaily and daily frequencies over a one-year period. No evidence of technical trading rule profitability is found using intradaily data. These results support the weak-form market efficiency hypothesis at the intradaily frequency. Moreover, moving average rules do not yield statistically significant profits at the daily level. However, the profits earned from applications of the RSI oscillator to daily foreign exchange rate data are found to be statistically significant . Next, high-frequency relationships between the S&P 500 index, the S&P 500 futures, and S&P Depositary Receipts (SPDRs) are analyzed using the covariance estimator of De Jong and Nijman (1997) as well as GMM estimation of systems of simultaneous equations. The futures contract is shown to play a price discovery role for other instruments involving the S&P 500, while the index has such a role for investors in SPDRs. The finding that the tutures contract is the main source of market-wide information corroborates the evidence in the literature, although the estimated lead of the futures over the index is smaller than previously noted. Finally, the hypothesis that an increase in risk causes investors to substitute away from risky assets such as equities and into less risky assets such as bonds in a 'Bight-to-quality' is empirically tested. A bivariate autoregressive conditional heteroskedasticity (ARCH) Markov-switching mode1 is developed for monthly U.S.stock and long-term government bond returns in order to examine the relationship between equity volatility and bond returns. Two stock volatility/excess bond retum regimes are identified in the data and monthly excess bond returns are found to be approximately 2% higher in the high equity volatility regirne than in the low volatility state. These findings have important asset allocation and risk management ramifications. CO-AUTHORSHIP
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Source Type:Master's Thesis

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Date of Publication:01/01/2000

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