Remark: In addition to this list the topics that can be found in “BA Topics” (BA Topics) are also suitable for a master thesis if you provide sufficient data analysis, i.e. empirical work. Guidelines for writing a thesis can be found here: Guidelines for Writing a Thesis or Seminar Paper at QBER
Emerging market economies (EME) turned out to be highly vulnerable to global economic cycles. Attributable to a high dependence on the international trade, particularly in commodities, EMEs typically maintain a managed exchange rate regime. This results in a higher frequency of interventions operations than in developed countries. However, the question whether interventions are an effective tool to control the exchange rate is still open for discussion. The reason might be that due to their orientation towards international markets, these economies are exposed to specific anomalies. For instance, the effects of capital flows on the exchange rate of emerging economies might be stronger given the low level of financial market development including major event such as speculative attacks and currency crisis. Moreover, Dutch Disease symptoms and their destabilizing effects on macroeconomic variables may pose policy challenges in EMEs.
Heterogeneous Traders in International Financial Markets
The idea of efficient markets has been very appealing to economists and its strong intellectual dominance led the academia to dismiss real-world trading behavior of financial market participants. In fact, financial markets exhibit a set of well-documented statistical properties such as heteroscedasticity, excess volatility and persistent misalignments, none of which is easy to comply with the established theoretical framework of Rational Expectations. Furthermore, technical analysis which is heavily applied among financial market practitioners has been denied as irrational flaws to be driven out of the market sooner or later. A renewed interest in technical analysis took place when researchers found that predictable patterns in asset prices may generate risk-adjusted excess returns to be exploited by technical analysis with consequences for international asset pricing.
Monetary Policy in the EMU: Convergence or Divergence?
The European Central Bank has been challenged with the recent crises and economic heterogeneity among member countries. In order to evaluate the country-specific effects of the ECB’s monetary policy, Taylor rules should be estimated to assess whether the Euro area wide policy is appropriate. A deviation of country-specific Taylor rules from the ECB benchmark could be interpreted as a monetary stress level indicator. Doing so will shed some light on the evolution of economic heterogeneity in the EMU before and after the crises.
Exchange Rates in Monetary Policy
Ensuring low and stable inflation is one of the main monetary policy strategies of advanced and emerging market central banks. In an environment of open capital accounts and flexible exchange rates monetary authorities have to determine to which extent exchange rates should be included in their policy design. According to the so-called open economy trilemma, it is not possible to simultaneously maintain fixed exchange rates, free capital movements and an independent monetary policy. The Bretton Woods experience, where participating countries failed to isolate their economies from global inflationary trends under the regime of fixed exchange rates, can serve as evidence in favor of this trilemma. This raises a question whether inflation targeting central banks should react on exchange rate fluctuations. The results from the literature are ambiguous and suggest that including the exchange rate in a Taylor interest-rate rule have either slight economic gains or no effect or it can even reduce economic welfare. The goal of the thesis is to empirically reinvestigate the role of exchange rates in the conduct of inflation targeting monetary authorities.
The Financialization of Markets for Agricultural Commodities
In economic policy circles as well as academia the price boom on almost all commodity markets between 2001 and the middle of 2008 has often been associated with the financialization of these markets and the corresponding increase of speculative activity. When it comes to speculation the public perception is biased towards potential adverse distributional effects. For instance, large parts of the German media focus on food markets, the effects higher prices have for the population in developing countries, and especially the important role of the Deutsche Bank and Allianz in these market segments. Foodwatch (2013) recently published several internal documents (2008-2012) from both institutions, where the authors admit that speculation increases commodity price volatility in specific periods and acknowledge the potentially negative ramifications for farmers and consumers. These claims obviously call for academic research on the issue.
Forecasting Exchange Rates: Time-Varying Relationship between Exchange Rates and Fundamentals
Foreign exchange rates are perceived to be of major importance as they exerting an immediate influence on cross-border transactions such as trade in goods and services as well as capital movements. At the same time the empirical literature repeatedly revealed the failure of standard macroeconomic models to explain and forecast exchange rates (Meese and Rogoff, 1983). In a recent contribution Bacchetta and van Wincoop (2004) argue that FX market participants may misperceive the relative importance of fundamentals due to an unobservable component problem and change the weight assigned to fundamentals over time. In fact, Fratzscher et al. (2012) show that considering this inference problem improves the in-sample fit of exchange rate models. This master thesis should empirically investigate whether the time-varying nature of coefficients could also improve the out-of-sample performance of so-called Taylor-rule exchange rate models.
Smooth transition regression models of uncovered interest parity
Since the seminal contribution of Fama (1984) the so-called uncovered interest parity puzzle remains a heavily investigated area of research. The Master thesis should empirically assess whether the class of smooth transition regressions may shed new light on the relationship between interest rates and exchange rates and help to attenuate the parity puzzle.
Capital movements and asset prices
Since the seminal contribution of Hau and Rey (2002) the relationships between exchange rate returns, excess equity returns and international capital flows have extensively been studied in the literature. The basic version of the model predicts that if the foreign equity market outperforms the domestic equity market the exchange rate should fall, thus there is a negative correlation between exchange rate returns and foreign excess equity returns. The Master thesis should analyze this relationship by also including the period of the recent financial crisis and present a number of extensions put forward in the literature.
The global financial cycle and the open economy trilemma
Reflecting the recent policy experience, Rey (2013) suggests that global liquidity and risk perception instead of local factors are dominating countries asset prices and exchange rates. During the financial crisis, the fundamentally changed risk sentiment of US and European investors and the need to adjust their international portfolios according to new accountancy rules have triggered a deleveraging process that entailed a general withdrawal of investors from foreign markets, irrespective of expected earnings or the exchange rate. This idea is also supported by Forbes and Warnock (2012) finding that extreme capital flow episodes are mainly explained by global factors, especially by global risk. This master thesis is expected to empirically analyse the potential dominance of global factors relative to domestic factors. The results will have important consequences for the validity of the famous open economies trilemma in international monetary policy.