Abstract

This thesis consists of three essays. The first essay (chapter 2) examines the correlations between bond markets, stock markets and currency forwards during the quantitative easing (QE) programs launched by the U.S. Federal Reserve. Using DCC-GARCH models, we document a spillover impact of QE on the international financial markets and find that these correlations differ by QE period across developed and emerging countries. Our findings provide new insights into the impact of unconventional monetary policy regimes on the relationships between various international financial asset markets.
The second essay (chapter 3) examines the effectiveness and performance (E&P) of hedging international portfolios of bonds from developed and emerging countries. The excess returns and the variances of these portfolios are significantly lower during the QE versus pre-QE period. During the QE period, excess return and variance sensitivities are positive and negative with the Fed’s MBS holdings and become less positive and less negative with the Fed’s holdings of Treasuries. Hedging E&P during the QEs depend on the chosen hedging strategy and level of economic development. Results are robust using other hedging E&P measures and excluding countries with their own QEs.
The third essay (chapter 4) finds that the integration of international bond and stock markets in 31 countries are affected significantly by U.S. quantitative easing (QE). After conceptually linking variations in the QE effects on bond and stock market integration to six transmission channels, we find that the actual effects depend upon the Fed holdings (MBS or Treasuries), channel considered, asset type (bond or stock), and the economic development categorization of the countries (developed or emerging). Cross-border banking flows as our proxy for the risk-taking channel significantly increase bond and stock market integration during each QE period for both developed and emerging countries.