Essays in empirical macroeconomics and finance

Essay 1: Exchange Rate Dynamics and Global Monetary Policy Spillovers: Time-Varying Dynamic Causal Effects. We propose a novel econometric approach to estimate time-varying dynamic causal effects of structural shocks using external instruments in a factor-augmented-VAR model. Using the Bayesian MCMC estimation method we estimate a model consisting of output, inflation rates, interest rates, and exchange rates for the United States, Canada, Germany, Japan, and the United Kingdom. We find uniformly strong evidence over time that the exchange rate overshoots in response to an exogenous monetary policy shock. Furthermore, we find that the monetary policy shock played a significant role in the exchange rate dynamics, and its contributions were particularly large during the 2008-2009 financial crisis. Essay2: Commodity Return Comovement, Exchange Rate, and Uncertainty Shock. This paper investigates how the uncertainty shock affects the commodity return empirically, using a time-varying parameter dynamic factor model with stochastic volatility (TVP-DFM-SV). We extract a common factor and eight sector-specific factors from 43 different commodity returns (Ma, Vivian, and Wohar, 2019). The common factor is interpreted as the combination of the shocks which only affects the commodity markets idiosyncratic through the general equilibrium (Alquist, Bhattarai and Coibion, 2019), and is orthogonal to the sector-specific factors and commodity-idiosyncratic factors. Then we show the time-varying impulse responses of the common factor and several relevant marco fundamentals to uncertainty shock identified by the external instrument variable (IV). We find that uncertainty shock decreases the commodity return through the common factor, and this effect is time-varying, specifically, during the recession it is stronger. Besides, the uncertainty shock could be a reason behind the negative relationship between commodity return and the strength of the US dollar. Essay 3: A New Approach to Connecting the Dividend-Price Ratio and Stock Returns. There is a long debate on the performance of dividend-price ratio on the stock returns predictability. Most of the literature argues that the predictability decreases after the 1990s. Since Campbell-Shiller decomposition shows that the dividend-price ratio contains the information of both the future returns and future dividend growth, a linear predictive regression of stock returns on the dividend-price ratio may generate biased results due to the measurement error or omitted variable issues. Therefore, this paper proposes a new approach to study the nonlinear Granger causality of dividend-price ratio on stock returns. We conduct an unobserved component model and connect stock returns and the dividend-price ratio through their innovations. We show that our model can be represented by a reduced-form ARMAX process, and it can increase the in-sample predictability.--Author's abstract

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