Essays in applied econometrics and finance

Abstract

This thesis comprises three essays. The first two chapters address topics in commodity markets and their interaction with derivative and other asset markets. The third essay deals with the effects to and from fiscal policy that arise due to the structure of the relationship between central and regional governments. Finance and applied econometrics constitute the common thread for these articles. The first two take a financial economics and financial econometrics perspective, while the third essay addresses a topic of public finance with an empirical approach. The first chapter offers an explanation for volatile oil prices. Using information from options and futures I document economically large jump tail premia in the crude oil market which can be related to investors' \fear". These premia vary substantially over time and signiffcantly forecast crude oil futures and spot returns. The results suggest that oil futures prices overshoot (undershoot) in the presence of upside (downside) tail fears in order to allow for smaller (larger) risk premia thereafter. The second essay relates the comovement of stock and commodity prices to increased participation of financial investors in commodity future markets. I present a partial equilibrium model in which demand for futures by financial investors transmits stock market shocks into commodity prices via a time varying risk premium. Empirically, I find that commodity index investors react systematically to stock market shocks by adjusting their commodity risk exposure. In the third chapter, joint with Abián García Rodríguez, we investigate the relationship between fiscal decentralization - the share of government spending and taxation carried out at the the subnational level - and fiscal policy effects. Using a cross-section of countries, we document a positive relationship between decentralization and the effectiveness of fiscal policy as measured by the size of fiscal multipliers. We also present a case study for the decentralization process in Spain and find that it had a positive impact on output growth.