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Three Essays on Monetary and Financial Economics Open Access


Other title
bank runs
monetary policy
pairs trading
Type of item
Degree grantor
University of Alberta
Author or creator
Xu, Xun
Supervisor and department
Smith, Todd (Economics)
Examining committee member and department
Xu, Yingfeng (Economics)
Smith, Constance (Economics)
Maheu, John (Business)
Beason, Dick (Business)
Huang, Haifang (Economics)
Department of Economics

Date accepted
Graduation date
Doctor of Philosophy
Degree level
This thesis contains three chapters on financial and macroeconomics. Chapter 1 is an empirical study on what is referred to in the finance literature as “pairs trading”. Pairs trading involves simultaneous trades in two equity securities that have been identified as being very highly correlated historically. The idea is to trade the pairs when their prices diverge from another and to unwind the trade when their prices (hopefully) converge. The contribution of chapter 1 is to rigorously examine alternative techniques for identifying stock pairs. I consider two main techniques: a “distance” approach and cointegration. Each of these techniques is evaluated when pairs are selected within the same industry (“restricted pairs”) and when pairs are selected from the broad universe of stocks (“unrestricted pairs”). The main findings are that unrestricted pairs are preferred to restricted pairs for the distance approach and that restricted pairs work better for the cointegration approach, especially for the services, financial and retail trade sectors. In addition, the cointegration approach yields a higher excess return than the distance approach. Nevertheless, more risk-averse investors might prefer the distance approach based on my analysis of information ratios for the two approaches. Chapter 2 is an empirical study of monetary policy in China. The main focus is identifying the effectiveness of alternative monetary instruments in affecting real economic activity. This chapter employs a structural vector autoregression (SVAR) methodology that is tailored to specific characteristics of the environment faced by Chinese policymakers—namely, exchange rate targeting, capital flow restrictions, and sterilization of the buildup of foreign exchange reserves. Briefly, we find that the money supply is an effective monetary instrument, while the interest rate is not. Chapter 3 contains a theoretical model of bank runs. The main contribution is to show that bank runs—more broadly interpreted as financial instability—can arise purely from the joint interaction of business cycle fluctuations and ordinary consumption smoothing by households. To highlight this, chapter 3 shows that, in addition to classic panic-based bank runs, bank runs can be caused by a decrease in aggregate labor income, i.e., a recession.
Permission is hereby granted to the University of Alberta Libraries to reproduce single copies of this thesis and to lend or sell such copies for private, scholarly or scientific research purposes only. Where the thesis is converted to, or otherwise made available in digital form, the University of Alberta will advise potential users of the thesis of these terms. The author reserves all other publication and other rights in association with the copyright in the thesis and, except as herein before provided, neither the thesis nor any substantial portion thereof may be printed or otherwise reproduced in any material form whatsoever without the author's prior written permission.
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