Two Essays in Finance and Economics: “Investment Opportunities in Commodity and Stock Markets for G7 Countries” And “Global and Local Factors Affecting Sovereign Yield Spreads”

In chapter 1, I investigate the return links and dynamic conditional correlations between the equity and commodity returns for G7 countries from 2000:01 to 2014:10. The commodity futures include BCOM Index which contains the futures and spot price of 22 commodities, Brent and Crude oil futures, gold and silver futures, Wheat, Corn and Soybean futures and CRB index. The finding indicates that during the full sample period GOLD, WHEAT and CORN have the smallest dynamic conditional correlations with all the Equity indexes. In addition, the correlations between the GOLD/Equity pairs are negative during the financial crisis. This fact indicates the benefit of hedging the stock portfolios with gold futures while we have stress in the financial markets. The results from hedging effectiveness suggest that all the commodity/stock portfolios provide better diversification benefits than the stock portfolios. In average, including CRB, BCOM and GOLD futures to the stock portfolios have the highest hedging effectiveness ratios. Chapter 2 investigates the impact of global and local variables on the Sovereign bond spreads for 22 developed countries in North America, Europe and Pacific Rim Regions, using monthly data from January 2010 to March 2015. There are a few main findings of this chaper. First, the global factors are considerably more important in déterminant the sovereign bond spreads for all the regions. Second, for the bond spread of each region over its local government bond, the countries’ domestic fundamentals are found to be more influential determinants of the spreads, compared to the spread over US government bond as a safe haven government bond. Third, the bond spreads in the Eurozone area is less influenced by the global factors compared to the other regions. Fourth, the sovereign bond spreads of all regions are positively related to the US corporate high yield spreads as a proxy of market sentiment and the log of VIX index as measurement for the investor risk aversion. The coefficient of the log of VIX index shows the strong power of the stock market implied volatility on determining the yield spreads in the fixed income market