Essays on Empirical International Asset Pricing
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This dissertation consists of two essays in empirical international asset pricing. In the first essay, I document carry trade returns based on the moments extracted from options on the underlying currencies. I establish three important results. First, a currency pair is predicted to have greater excess returns if option-implied returns are more volatile, are more left-skewed, and have fatter tails than the returns of other currency pairs. Second, strategies based on option-implied information improve on benchmark strategies based on realized market returns and macroeconomic data. Third, if the option-implied returns of a currency pair are more left-skewed than in the past, anti-carry trades rather than carry trades perform better. In the second essay, I examine the relation between ex ante skewness and the cross-section of country-specific index returns. I show that the ex ante skewness measured using country-specific index options is negatively related to country-specific returns in the cross-section. The results are robust to controlling for volatility risk, macroeconomic variables, sensitivities to the international factor risks, and realized return moments. Trading strategies based on ex ante skewness which outperform benchmark strategies based on the aforementioned control variables. I also provide evidence of time-series return predictability using ex ante skewness for Asian and non-euro area European countries. These results suggest that investors in international indices are compensated for the exposure to skewness risk.