Essays on Currency Risk and Financial Frictions

Sammanfattning: This doctoral thesis consists of four independent empirical papers in financial economics.Although my work analyses three different financial markets (currencies, credit defaultswaps and exchange traded funds) the common thread is financial frictions. In my firstpaper, I empirically test (and find evidence in support of) the idea that a concentration ofa large number of levered speculators in the currency carry trade is driving the extremelosses observed in the data. In my second paper, my co-author and I survey the literatureon risk based explanations for the currency carry trade and find that the risk based storyis incomplete. In my third paper, my co-authors and I ask what is driving the trading ofsovereign credit default swaps (CDS). We find rich cross-sectional and time series variationin sovereign CDS trading and suggest that the bulk may be driven by hedging motives.My final paper focuses on the short-sales of equity exchange trades funds (ETFs).My co-author and I find that ETFs were actively used to bypass the 2008 short-sale ban.The list of papers comprising this thesis is as follows.