Essays on international capital markets

The recognition of benefits of international diversification, and the deregulation and internationalization of financial markets have spurred international investing. Therefore the analysis of the international capital markets looks of great importance. The expectations model has been one of the workhorses of empirical finance for a generation, and the first chapter of this dissertation develops statistical evidence concerning the expectations hypothesis beyond US government bond yields. The Campbell and Shiller regressions provide feeble evidence against the expectations hypothesis. However, long rates move in the opposite direction from the one predicted by the expectations hypothesis. Moreover, the regressions of excess returns on forward rates indicate that linear combinations of the latter into single factors have significant predictive power. The conventional yield factors do not appear to fully capture the single factors, but the slope factor seems to explain a significant fraction of their variation. Also, no macro variable succeeds in capturing the single factors. Lastly, foreign single factors tend to have important predictive power beyond that provided by the local single factors. Describing the optimal asset choice for savings depends on the details of the investing setting, and correlations across returns are particularly important. However, they have drawbacks as a measure of dependence. In the second chapter we construct a copula model to analyze dependence structures in major international capital markets. Left tail dependence appears to be the most common feature. We assess its economic relevancy by considering the problem of an investor who holds equities and bonds, and chooses positions in currencies to manage the risk. Asymmetric correlation behavior can be relevant for currency hedging. The third chapter considers the problem of an investor who wants to hold a diversified global portfolio, and we analyze the effects systemic risk in currency markets on portfolio choice. Even in minimal models with jumps, the risk of contagion can produce complex effects on currency hedging. Also, the well-defined status of a portfolio choice problem does not need to be robust to the inclusion of jumps. We calibrate our model to three international capital markets. The empirical relevance of systemic risks in exchange rates is not little, and the GMM estimates reveal that the recognition of systemic risk may unfold effects beyond the mere inclusion of jumps.