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Nature and management of financial risk in global stock markets

Zhu, Yanhui 2008. Nature and management of financial risk in global stock markets. PhD Thesis, Cardiff University.

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This thesis addresses three problems associated with the risk in stock markets from a global perspective. First, we investigate the empirical hedging effectiveness using index futures in six world major stock markets. A variety of econometric models including STVECM with bivariate GARCH error structure are employed. The within-sample and out-of-sample results suggest sophisticated models do not produce the best hedging strategies consistently and their usefulness has to be judged on a case-by-case basis. Second, we examine the cross hedging effectiveness of seventeen MS CI indices through a global approach of using a combination of the related index futures. A thorough comparison among strategies corresponding to different combinations of hedging instruments and econometric models is conducted for each MSCI index. The optimal hedge ratio vector is derived for each country on the basis of both within- sample and out-of-sample results. Third, we develop a global asset pricing model on the basis of Barro's rare disaster model to explain the equity risk premium puzzle. Despite the plausible analytical predictions on the expected return of the bill and equity and the equity risk premium, the global model fails to explain the scale of the equity premium observed in the data since the diversification in a global market brings down both the aggregate risk and the reward for holding risk equity. The former results in a rise in the expected return of government bills and the latter leads to a fall in the expected return of equities.

Item Type: Thesis (PhD)
Status: Unpublished
Schools: Business (Including Economics)
Subjects: H Social Sciences > HG Finance
ISBN: 9781303182495
Funders: Julian Hodge PhD Bursary, Cardiff Business School
Date of First Compliant Deposit: 30 March 2016
Last Modified: 10 Jan 2018 06:13

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