Essays on the Effects of External Economic Shocks on Asset Markets


Student thesis: Doctoral Thesis

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Award date26 Jun 2020


The volatility of international capital flows is always a common concern for researchers and policymakers. The first chapter shows that (1) stock price reactions to a hot money shock are very different across emerging markets, and (2) such differential responses could be explained by economic fundamentals. We take an unobserved component approach via the Kalman filter and obtain the fast-moving component from foreign direct investment, portfolio investment, and foreign loans in 22 emerging markets. We build a two-step factor-augmented VAR model for each emerging market and each type of hot money. We find that emerging markets with lower institutional quality and a lower quality of human capital tend to have a more significant peak response to a hot money shock.

In the second chapter, we study how external shocks from China and the U.S. would affect the housing markets of the two Asian financial centers, Hong Kong and Singapore, and distinguish these external shocks from internal shocks. We build a Bayesian VAR model with a block exogeneity assumption and employ a zero and sign restriction approach to characterize the small open economy property of Hong Kong and Singapore. We find an expansionary U.S. aggregate demand shock and monetary policy shock will lead to positive responses of the real housing price and the vacancy rate in Hong Kong, which is consistent with the recent research on real estate speculation. Such effects are absent in Singapore, which arguably has a higher degree of government intervention in the housing market. Furthermore, we argue that flipping in Hong Kong's housing market exists through a "wealth channel."

In the third chapter, we investigate the nexus between corporate real estate (CRE) holding and stock returns for listed non-financial and non-real estate firms around the world. In the literature, the liquidity-based and collateral-based theories predict a positive relationship between the CRE holdings and stock return. At the same time, a negative one is suggested by the "empire building" argument. The Global Financial Crisis provides a natural environment to examine the nexus between the CRE holdings and stock return. It is because a tightening of the financial constraint could turn a negative association into a positive one. Using panel regressions with a micro dataset, we find that such change occurs in the U.S. and Hong Kong. For the United Kingdom, a negative relationship preserves before and after the crisis, providing support to the "empire building" argument. On the other hand, a positive correlation is observed in our Japan, European, and Asia Pacific samples, providing support to the liquidity-based and collateral-based theories.

    Research areas

  • External shocks, Asset markets, Hot money