Essays on financial markets

The impact of uncertainty is one of the most widely studied topics in economics and finance. It has become a major concern for economists, policy makers, agents in financial markets and households. Pastor and Veronesi (2009) presented a theoretical model explaining how negative uncertainty causes contraction in economic activities, decrease in stock prices and reduction in demand. At the same time the model also shows that positive uncertainty such as advancement in technology and strengthening of trade links can have positive impact on real activity. The effect of uncertainty on the financial sector is an empirical issue. By utilizing Baker, Bloom and Davis (2016) Economic Policy Uncertainty index which is a robust proxy of policy induced economic uncertainty this work shows that in the UK, Jegadeesh and Tittman (1993) momentum returns only exist following months of low uncertainty and is absent following months of high uncertainty. Further, using time varying dynamic conditional correlation it is shown that stock markets in the OECD region are adversely affected by economic policy uncertainty. The results of the third chapter indicate that economic policy uncertainty significantly adds to the long term volatility in brent oil, silver, palladium and aluminium futures. The next part of the thesis empirically test the appropriateness of global optimization technique to fit non-convex yield curves of the Nelson-Svensson-Siegel family using Bundes Bank data. Lastly, using canonical models of instantaneous interest rate the results show that real interest rate in the US does not follow mean reverting behaviour between 1978-2017. This research adds to two strands of the existing literature. The first strand adds to research related to economic policy uncertainty, which is thus useful for policy makers and participants in the financial markets. The results provide evidence on reaping excess momentum profits following months of low uncertainty. The results also provide evidence against simultaneously investing across markets in the OECD region. Thirdly results show that metals like platinum and aluminium are safe hedges during periods of high economic policy uncertainty. The section on interest rates, adds to the existing literature such that it improves the overall accuracy of yield curve which are further used in policy making by economists. Using inappropriate methodologies to fit yield curves would not only result in spurious curves but also in flawed polices and policy outcomes. Lastly by calibrating real interest rate for the US policy makers can probe the elasticity behaviour of consumers and target inflation accordingly