Research Projects
Research Projects
This thesis examines the asymmetric effects of U.S. monetary policy and interest rates on the volatility of returns in the stock market of emerging countries using an asymmetric generalized autoregressive conditional heteroscedasticity model. The model incorporates the interest rate movements in the U.S. in the conditional variance equation and uses a dummy to explicate the asymmetric response of the volatility of the returns. Using daily returns data of 14 indices from a selection of countries and creating a dummy variable for the daily federal funds rate, the results show that the response of volatility to the contractionary movement in interest rate is significantly higher than the expansionary movement. The results also the differences in the response across the countries given the heterogeneity in global trade integration, financial structure, and financial developments. Moreover, the high-frequency identification of monetary policy surprises is also used for the analyses of the response of monetary policy. This exercise shows that the markets perceive the contractionary policy differently and differentiate between growth shocks and pure monetary policy shocks as well as the information effect of the FOMC decisions on the meeting dates.
Keywords: Financial markets, GARCH models, Macroeconometrics, Monetary policy
This study uses Monte Carlo simulations to investigate the finite sample properties of the Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) unit root tests. While both tests are widely used for determining the presence of unit roots in time series data, their performance can vary significantly in finite samples versus large samples. This research aims to evaluate and compare the power distortions of the ADF and PP tests across different sample sizes and degrees of autoregressive persistence.
The findings show that the PP test is a more robust choice for unit root testing in small samples, while both tests perform well with larger datasets. The visual representation, with six graphs for different values of 𝜌, clearly illustrates that the PP test maintains higher power than the ADF test across various scenarios, highlighting its advantage in empirical applications where sample sizes are limited.
The purpose of this research is to conduct an in-depth analysis of algorithmic stablecoins, centering particularly on the Terra Luna incident as a case study. This investigation seeks to dissect the dynamics and underlying factors contributing to the volatility of such cryptocurrencies. By examining the Terra Luna example, the study will identify key levers and strategies that could have mitigated or possibly prevented its dramatic crash. Through this analysis, the research aims to contribute to a better understanding of the operational challenges facing algorithmic stablecoins and propose viable solutions to enhance their stability and reliability in the digital currency market.
The implementation of an adaptive pool replenishment strategy in a series of stress tests on the system revealed an enhanced ability of the system to uphold the stablecoin's peg above $0.5 in 9 out of the 30 simulations. This improvement indicates a certain degree of resilience under specific market conditions. Interestingly, the average iteration number at which failures were observed during these simulations was 77,571, closely mirroring the results obtained under normal operational conditions. Therefore, while the adaptive replenishment strategy offers some improvements, there remains a fundamental instability that needs addressing.
The inspiration for this research topic originates from my personal observations and experiences within Pakistan. As a nation with a population of around 220 million people, Pakistan has undergone significant shifts in its socioeconomic landscape over the past few decades. Concurrently, the international community has witnessed comparable trends in the distribution of income—both within individual nations and on a global scale.
The objective of this paper is to delve into the underlying dynamics. Specifically, it seeks to scrutinize the cause-and-effect relationship between the advancement of financial institutions and the emergence or exacerbation of income inequality. By focusing on this intricate interplay, the study aims to shed light on whether the development of financial institutions acts as a driver of income inequality, or if income inequality influences the growth of financial institutions. This investigation holds the potential to uncover valuable insights into the economic fabric of not just Pakistan, but also its resonance with broader global patterns.
The direction of causality runs both ways and external factors such as quality of political institutions, education level, and the rule of law impact the linkage between the evolution of financial institutions and income inequality. Given a strong middle class, an economy possesses high-income growth, better human capital accumulation, and hence better political institutions which help in implementing relatively equitable and efficient financial institutions that are inclusive and deter the penetration of exploitative groups.
The relationship between income per capita and democracy has been one of the most discussed topics in the domain of development economics as well as political economy. Moreover, the relationship between income and democracy is not only visible across countries, instead, it is also apparent that the democratization process in countries has a strong association with economic growth across time.
This study aims to analyze the relationship between income per capita and democracy with the direction of causality being income per capita affects democracy. The objective of this project is to replicate the results of the study using instrumental variable regression technique.
The instrumental variable approach also failed to establish a causal effect of income on democracy despite using a strong inclusive instrument. These results act as a critique to the conventional understanding that a general increase in per capita income would improve the democratic structure and institutions.
Recent developments in literature synthesize that capital flows generate macroeconomic externalities that increase financial instability and distort aggregate demand management at the macroeconomic level.
I aimed to study the externalities that are created as a result of the use of capital controls, more specifically, in emerging market economies where capital flows are extremely volatile as well as how they differ across advanced economies versus emerging economies.
The effectiveness of capital controls differs among advanced economies and emerging market economies. Level of complexity of control versus institutional capacity. The 1.5% tax on FX transactions related to fixed-income investments in Brazil managed to increase the interest rate differential but did reduce the volume of net flows. Thailand saw an increase in the volume of net flows by outflow liberalization whereas this was ineffective in Korea. It is more efficient to have risk-specific controls in mature economies which would result in more robustness to shocks and shift the weight to safer forms of risks. However, in emerging markets where the institutions are weak, capital controls might result in increased circumvention.