Essays in international finance : price pressure in the Chilean FOREX market, exchange rate forecasting and commodity market spillovers

This thesis analyses how financial advisory firms may impact price movements in the Chilean peso FOREX market, examines the role of tail dependence in explaining the ability of commodity prices to forecast exchange rates in commodity-exporting economies, and revisits evidence of financial contagion between commodity and stock markets in such economies. The first essay, "Financial advisory firms, asset reallocation and price pressure in the FOREX market", analyses the effect of advisory firm's investment recommendations on the Chilean pension fund market. Such recommendations induce large, coordinated portfolio readjustments and a subsequent reallocation of pension fund holdings across asset classes. We study the potential for these portfolio asset reallocations in the Chilean pension fund industry to act as a mechanism for exerting price pressures in the Chilean FOREX market. We document investment recommendations generate significant price pressures and increase exchange rate volatility. Using a Central Bank of Chile proprietary database, we find other FOREX market participants anticipate portfolio adjustments after recommendations and front-run the pension fund trades. Our evidence suggests financial advisory firms create substantial effects on the Chilean FOREX market, pushing prices and volatility beyond fundamentals. Policy considerations aiming to regulate advisory firms may mitigate any undesirable impact on financial stability mandates. The second essay, "Asymptotic dependence and exchange rate forecasting", studies the tail dependence between changes in commodity prices and exchange rates. In a sample of commodity-exporting economies, we find that the source of the documented forecasting ability of commodity prices lies in a revealed asymptotic dependence relationship between the two variables at a daily frequency. Our results show that timing is crucial, with exchange rates adjusting quickly to commodity price shocks. Only daily, contemporaneous observations capture both the forecasting ability of commodity prices and the asymptotic dependence between these variables, with the evidence disappearing when using lagged commodity returns or longer frequency (monthly or quarterly) observations. Our evidence suggests that the commodity market news conveying information relevant for the value of the exchange rates is transitory and short-lived. The third essay "Commodity market spillovers? Revisiting the impact on financial markets" examines the relationship between commodity and stock markets using a sample of nine commodity-exporting economies between 2000-2019. Prior research attributes the increase of comovement between markets to the effect of contagion initiated by commodity price shocks. However, we find that the documented increase in comovement during crisis episodes does not originate from shocks impacting on commodity markets. Indeed, after controlling for the effect of time varying investor risk aversion, we do not find evidence of financial contagion between markets. Our findings suggest that controlling for the effect of time-varying investor risk aversion is a key element in accurately capturing the relationship between asset returns in these markets.