Essays on Financial Markets

This thesis explores the optimal trading strategies in different types of financial markets and its impact in shaping the investment decisions and patterns across the individuals and countries. The findings show that there are long term portfolio diversification possibilities among stock market, the short term possibilities, however, are extremely limited. In regards to the foreign exchange markets, 60% of the long run variations in the real price of gold attributes to the carry trade strategies. Moreover, the findings illustrate that neighbouring countries tend to hold the financial asset from the same destination country, and such spillover effect is stronger when both countries adopt pegged exchange rate regime. These have given researchers a better understanding of the market mechanism.