Financial markets: market Information, investment strategies and spillovers

Financial markets exhibit a large degree of co-movement and reflect developments in the economy and policymaking. This thesis incorporates three empirical projects, each with a unique link to financial markets. Firstly, the thesis analyses the prevalence of fiscal policy manipulation before elections. Two potentially limiting factors to such manipulation by incumbent governments are assessed - fiscal institutions and press freedom. Both factors are shown to limit opportunistic spending, while an interaction effect between the two factors is uncovered. A threshold for press freedom exists, beyond which fiscal institutions no longer limit opportunistic spending. Secondly, the information content of interest rates for returns on currencies is studied. Exchange rates are shown to be predicted by a factor describing the different interest rates across maturities. Using this predictive ability for investing in different currencies leads to higher economic returns than a popular trading strategy based on interest rate differentials. This is likely attributable to future rises in short term interest rates. Thirdly, the international linkages of several financial markets are studied in a model with multiple countries and assets. It distinguishes between a period of regular monetary policy and the period following the onset of the crisis during which central banks around the world switched to new monetary policy tools. A large influence of US markets on international counterparts is found. In times of new policy tools, the international asset linkages undergo some change, with short term interest rates and government bonds influenced more strongly by international factors