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[2005] Three Essays in International Finance

[2005] Three Essays in International Finance

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Published by: Mohamed Ismael Elshiekh on Nov 09, 2010
Copyright:Attribution Non-commercial


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THREE ESSAYS IN INTERNATIONAL FINANCEDISSERTATIONPresented in Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy in the Graduate School of The Ohio State UniversityByRodolfo Martell, M.A.The Ohio State University2005Dissertation Committee: Approved byProfessor René M. Stulz, Adviser Professor G. Andrew Karolyi _________________ Adviser Professor Bernadette A. Minton Graduate Program in Business Administration
ABSTRACTRecent research in international finance focuses on the extent to which marketsare integrated across countries, how shocks propagate from one country to another andhow firms in foreign countries react to country level shocks. This dissertation providesempirical evidence on the degree of integration in international bond markets, on the propagation of extreme shocks between cross-listed shares and domestic markets and onthe dispersion in capital market reactions across firms to sovereign rating changes.In the first dissertation essay, I study the determinants of credit spread changes of individual U.S. dollar denominated bonds – domestic and foreign sovereign – usingfundamentals specified by structural models. Credit spreads are important determinantsof the cost of debt for all issuers and are fully determined by credit risk in structuralmodels. I construct a new dataset of domestic corporate and sovereign U.S. dollar bonds,which I use to find that changes in spreads not explained by fundamentals have two largecommon components that are distinct for each type of debt I study. Using a vector autoregressive (VAR) model, I find that domestic spreads are related to the lagged firstcomponent of sovereign spreads. Consequently, even though there is nocontemporaneous common component in bond spreads, there seems to be a commoncomponent when focusing on the dynamics of these spreads. Traditional macro liquidity
variables are related to the common components found in domestic and sovereignspread changes. My findings suggest possible explanations for the common componentdocumented by previous research in domestic debt spreads. My research shows that, after taking into account the dynamics of the common components in credit spreads acrossdebt types, the cost of debt for firms and countries depends to some extent on shocks thataffect all types of debt.The second dissertation essay studies the extreme linkages between LatinAmerican equities and the US stock market using tools from Extreme Value Theory(EVT). Bivariate extreme value measures are applied on six different country pairs between the U.S. S&P500 Index and each of the following countries: Argentina, Brazil,Chile, Colombia, Mexico and Venezuela. I find evidence of: a) asymmetric behavior inthe left and right tails of the joint marginal extreme distributions, and b) differences inextreme correlations for different instruments (investing in ADRs vs. investing directly inthe local stock markets) when no difference was to be expected. There is also evidence of a structural change in the correlations for the Mexican case before and after the 1995Mexican crisis.The third dissertation essay studies the effect of sovereign credit rating changesissued by Standard and Poor’s and Moody’s on the cross section of domestically tradedstocks. I first establish, consistent with earlier literature that analyzed similar phenomenain the U.S. (e.g. Holthausen and Leftwich, 1986; Goh and Ederington, 1993), that localstock markets react only to news of sovereign credit rating downgrades. Cumulativeabnormal returns of stock indices also show that investors react only to ratingannouncements made by Standard & Poor’s and not to those by Moody’s. I then study the

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