Essays on Risk and Uncertainty in Economics and Finance

This thesis adds to the resolution of two problems in finance and economics: i) what is macro-financial uncertainty? : How to measure it? How is it different from risk? How important is it for the financial markets? And ii) what sort of asymmetries underlie financial risk and uncertainty propagation across the global financial markets? That is, how risk and uncertainty change according to factors such as market states or market participants. In Chapter 2, which is entitled “Momentum Uncertainties”, I study the relationship between macroeconomic uncertainty and the abnormal returns of a momentum trading strategy in the stock market. I show that high levels of uncertainty in the economy impact negatively and significantly the returns of a portfolio of stocks that consist of buying past winners and selling past losers. High uncertainty reduces below zero the abnormal returns of momentum, extinguishes the Sharpe ratio of the momentum strategy, while increases the probability of momentum crashes both by increasing the skewness and the kurtosis of the momentum return distribution. Uncertainty acts as an economic regime that underlies abrupt changes over time of the returns generated by momentum strategies. In Chapter 3, “Measuring Uncertainty in the Stock Market”, I propose a new index for measuring stock market uncertainty on a daily basis. The index considers the inherent differentiation between uncertainty and the common variations between the series. The second contribution of chapter 3 is to show how this financial uncertainty index can also serve as an indicator of macroeconomic uncertainty. Finally, I analyze the dynamic relationship between uncertainty and the series of consumption, interest rates, production and stock market prices, among others. In chapter 4: “Uncertainty, Systemic Shocks and the Global Banking Sector: Has the Crisis Modified their Relationship?”, I explore the stability of systemic risk and uncertainty propagation among financial institutions in the global economy, and show that it has remained stable over the last decade. Additionally, I provide a new simple tool for measuring the resilience of financial institutions to these systemic shocks. My contribution to the literature in this essay is mainly the examination of the characteristics and stability of systemic risk and uncertainty, in relation to the dynamics of the banking sector stock returns. This sort of evidence is new to the literature and is supportive of past claims, made in the field of macroeconomics, which hold that during the global financial crisis the financial system may have faced stronger versions of traditional shocks rather than a new type of shock. In chapter 5, “Currency downside risk, liquidity, and financial stability”, I analyze downside risk propagation across global currency markets and the ways in which it is related to liquidity. I make two primary contributions to the literature. First, I estimate tail-spillovers between currencies in the global FX market. This index is easy to build and does not require intraday data, which constitutes an important advantage. Second, I show that turnover is related to risk spillovers in global currency markets. Chapter 6 is entitled “Spillovers from the United States to Latin American and G7 Stock Markets: A VAR-Quantile Analysis”. This essay contributes to the studies of contagion, market integration and cross-border spillovers during both regular and crisis episodes by carrying out a multivariate quantile analysis. I focus the analysis carried out in this chapter on Latin American stock markets, which have been characterized by a highly positive dynamic in recent decades, in terms of market capitalization and liquidity ratios, after a far-reaching process of market liberalization and reforms to pension funds across the continent during the 80s and 90s. I documented smaller dependences between the LA markets and the US market than those between the US and the developed economies, especially in the highest and lowest quantiles.En esta tesis se exploran formas óptimas de medir la incertidumbre macroeconómica y sus impactos sobre la actividad económica y los mercados financieros; así como la propagación internacional del riesgo en los mercados de acciones y de divisas. En el primer capítulo de la tesis se muestra que los retornos de las estrategias de inversión basadas en extrapolar los ganadores y perdedores recientes en el mercado, con el fin de decidir en que títulos invertir en el futuro (momentum), son susceptibles al nivel de incertidumbre registrado en la economía. Cuando la incertidumbre es alta, este tipo de inversiones se vuelven sumamente riesgosas y poco rentables, y por tanto no son recomendables. En el segundo capítulo de la tesis se propone un índice de incertidumbre construido con retornos diarios del mercados de acciones, el cual presenta mejores propiedades que otras alternativas en la literatura. Se utiliza este índice para mostrar las dinámicas macroeconómicas que siguen a un choque de incertidumbre, las cuales son examinadas a la luz de la literatura teórica al respecto. En el tercer capítulo de la tesis se examinan la propagación de la incertidumbre y el riesgo sistémico a las entidades bancarias globales, se estima un modelo de riesgo sistémico que permite mostrar como la propagación del riesgo ha permanecido estable durante las últimas décadas, y además, permite ofrecer nuevas listas de instituciones financieras vulnerables ante los choques de naturaleza sistémica en el mercado, que complementan las que actualmente existen en la literatura y en la práctica regulatoria. En el cuarto capítulo de la tesis se propone un indicador de estabilidad financiera para el mercado de divisas. Tal indicador se basa en el análisis de los cuantiles de depreciación del mercado de divisas, que por definición son de mayor interés para los reguladores, en cuanto está relacionados con las posibilidades de crisis cambiarias. Las asimetrías en la propagación de choques internaciones que se registran durante las depreciaciones (en comparación con los periodos de apreciación) se analizan a la luz del factor de liquidez en el mercado. En el quinto y último capítulo se analiza el efecto choques provenientes del mercado de acciones de Estados Unidos, sobre 6 mercados maduros y seis mercados emergentes de Latino América. Se muestra que la propagación depende del momento en el que se encuentre el mercado al momento de registrarse el choque (al alza o a la baja) y se proponen estrategias de diversificación internacional de portafolios de activos financieros