Time-varying dynamics in financial macroeconomics and markets

Stock market interdependence has been evidenced in the literature to bear structural breaks or repeated variations. These variations arise because of stock market crashes, liberalization of capital flow, shifts between fixed and floating exchange rate regimes, development in informatics technology, accumulation of capital due to higher productivity of labor and capital, digitalization of capital markets, and cross-listing.
The third chapter investigates the impacts of globalization, geopolitical risks, and policy-related economic uncertainty on the evolution of the G7 stock markets’ cointegration. The results reveal that variations in a number of financial risk factors, economic policy uncertainty, and world geopolitical risk have a significant impact on cointegrating coefficients. The US stock market is found to have greater exposure to worldwide geopolitical conflicts than the other G7 stock markets.
The fourth chapter introduces two new time-varying measures of the strength and instability of the cointegration relation. Although a cointegration relation, in general, may undergo instantaneous variation or a structural break, the intensity of the relation may remain strong. The chapter estimates time-varying lambdas introduced by Johansen (1988). The instability of the cointegration relation is another measure introduced in this chapter that can represent the severity of the shocks in the varying cointegrating vectors. We find that the growing globalization of the world's economies restrains market segmentation during recent economic crises, in particular the global financial and COVID-19 crises. The growing China was found to negatively impact the 7-variate cointegration of the G7 in the recent decade.
A new decomposition of the real exchange rate into speculative and non-speculative components has been the focus of the fifth chapter. The specifications of both components involve an autoregressive term and are assumed to be unobservable. The speculative component depends on the interest rate differential of the countries in the parity. Analysis of the evolution of price convergence reveals that the UK parities with Euro-zone countries are steadily strengthening, whereas the parities with Japan undergo a fragile process of price convergence.
The sixth chapter examines the market timing skills of fund managers during periods of disagreement between options and stock markets. We investigate the timing ability of hedge funds by relating the discrepancy between options and stock markets to fund performance. We observe that hedge fund managers time their portfolios efficiently around periods of high disagreement between options and the stock market.