October 2006

My research concerns the interaction between international financial markets and macroeconomic variables, such as output and consumption. My first paper addresses the puzzle of the apparent failure of integration into financial markets to increase macroeconomic risk sharing, claiming that the puzzle is the artefact of several econometric shortcomings in previous studies. This finding has strong policy implications for small open economies considering their level of engagement with financial markets.

My second paper concerns the so-called carry trade, which is the strategy of borrowing money in a low interest rate economy in order to invest it in a higher interest rate economy. This strategy has been very popular in recent years, with some estimates claiming a total of $1 trillion staked on the yen carry trade. That the strategy has historically shown positive excess returns is something of a mystery, since arbitrage action by investors should eliminate the returns. My paper identifies risk factors associated with the carry trade, including one not previously examined, namely stock market risk of the target currrency. It is claimed that exposure to these risk factors rationalises the excess returns.

International Financial Integration and Consumption Risk Sharing
IIIS Discussion Paper No. 241