Econ 642 International Finance II

Spring 2008

 

REQUIREMENTS

This is the second PhD. course in International Macroeconomics and Finance. Students should have completed ECON 641 (and all First Year Requirements) before taking the course. Any student wishing to take the course without these requirements must obtain my permission.

 

Schedule

Classes will be held every Thursday from 1:50 to 4:00. Room: ICC 550.

 

Grading Policy

Home Work: 30% of grade,. Take Home Final Exam: 70% OF GRADE.

 

Home Work 

Problem Set 1

 

 

Course Material

There is no text for the course. However, the following books will provide background material. (Any student contemplating research in international finance will want to have these books to hand.) The best place to buy any of these texts is on line at either http://www.amazon.com/ or http://www.barnesandnoble.com/.

 

International Macro Texts

Foundations of International Macroeconomics, by Maurice Obstfeld and Kenneth Rogoff, MIT Press, October 1996.

International Macroeconomics and Finance: Theory and Empirical Methods, by Nelson Mark, Blackwell, September 2001.

Asset Pricing

Asset Pricing, by John Cochrane, MIT Press.

The Econometrics of Financial Markets, by John Campbell, Andrew Lo, and Craig MacKinlay, Princeton University Press. 

Asset Pricing under Asymmetic Information, by M. Brunnermeier, Oxford University Press.

The Microstructure Approach to Exchange Rates, by R. K. Lyons, MIT Press.

 

Topics

1.            Exchange Rate Dynamics (Macro Models)

a)        The Empirical Challenge:

                                                  i.      Engel, C. and K. D. West. 2005. “Exchange Rates and Fundamentals.” Journal of Political Economy, vol. 113, no. 3, June 2005, pp. 485-517.

                                                ii.      Meese R. and K. Rogoff, “Empirical Exchange Rate Models of the Seventies”, Journal of International Economics 14 3-24, 1983

                                                iii.      Flood R. and A. Rose,1995. Fixing exchange rates: A Virtual Quest for Fundamentals", Journal of Monetary Economics, 36: 3-37.

                                                iv.      Mark, N. 1995. Exchange Rates and Fundamentals: Evidence on long-horizon predictability. American Economic Review 85: 201-218.

                                                  v.      Mark Chapter 2,  Chapter 3

 

b)       Traditional Macro Models

                                                  i.      Evans, M., “Macro Models of Exchange Rate Determination”, Mimeo Georgetown.

                                                ii.      Froot K. and K. Rogoff, "Perspectives on PPP and Long-Run Real Exchange Rates", in Handbook of International Economics, Gene Grossman and Ken Rogoff, ed, North Holland, 1995 also NBER WP 4952

                                              iii.      Engel C. and J. Rogers, "How Wide is the Border?" American Economic Review 1996 Dec, pp1112-1125;

                                              iv.      Engel C. "Accounting for US Real Exchange Rate Changes," Journal of Political Economy 107(3), June 1999, pages 507-38;

                                                v.      Rogoff K. "The Purchasing Power Parity Puzzle", Journal of Economic Literature Vol. 34, No. 2. (Jun., 1996), pp. 647-668;

 

c)        New Macro Models

                                                  i.      Evans, M, Foundations of Foreign Exchange, Chapter 4

                                                  ii.      Bacchetta, P., and E. van Wincoop, Can information dispersion explain the exchange rate disconnect puzzle? American Economic Review, 2006

                                                iii.      Rey H. and P-O Gourinchas, International Financial Adjustment, Journal of Political Economy, 2007.

                                              iv.      Hau H. and H Rey, Exchange Rates, Equity Prices and Capital Flows Review of Financial Studies, 2006.

                                                v.      Jeanne O. and A. Rose, "Noise trading and exchange rate regime", Quarterly Journal of Economics 2001, also NBER WP 7104.

 

2.      Exchange Rate Dynamics (New Micro Models)

a)      Order Flows and Exchange Rates:

                                                  i.      Evans, M, Foundations of Foreign Exchange, Chapter 6, Chapter 7, and Chapter 8

                                                ii.      Evans M. and R. Lyons, Order Flow and Exchange Rate Dynamics, NBER WP7317, and Journal of Political Economy 2002.

                                              iii.      Evans M. and R. Lyons, Informational Integration and FX Trading, The Journal of International Money and Finance, November, 2002,

                                              iv.      Evans, “FX Trading and Exchange Rate Dynamics ”, Journal of Finance, December, 2002.

                                                v.      Lyons R, 2001. The Microstructure Approach to Exchange Rates, chapter 7.

                                                vi.      Evans M. and R. Lyons, “Time-Varying Liquidity in Foreign Exchange”, Journal of Monetary Economics, July, 2002.

 

b)      The Origins of Order Flow Macro News

                                                  i.      Andersen, T., T. Bollerslev, F. Diebold, and C. Vega, Micro effects of macro announcements: Real-time price discovery in foreign exchange, American Economic Review, 2003

                                                ii.      Evans M. and R. Lyons, “How Is Macro News Transmitted to Exchange Rates?”, Journal of Financial Economics, 2008

                                              iii.      Evans M. and R. Lyons,  “Do Currency Markets Absorb News Quickly?”, The Journal of International Money and Finance, 2005.

 

c)        The Origins of Order Flow: Fundamentals

                                                  i.      Froot K. and T. Ramadorai,  “Currency returns, institutional investor flows, and exchange rate fundamentals” Journal of Finance, 2006.

                                                ii.      Evans M. and R. Lyons, “Exchange Rate Fundamentals and Order Flow”, mimeo, March 2004.

 

d)      Information Aggregation

                                                   i.      Evans, M, Foreign Exchange Market Microstructure

                                                  ii.      Evans M. and R. Lyons, “A New Micro Model of Exchange Rate Dynamics ” NBER Working Paper No. 10379.

                                                iii.      Evans M. and R. Lyons, Meese-Rogoff Redux: Micro-Based Exchange Rate Forecasting, American Economic Review P&P, 2005

                                                 iv.      Evans M. and R. Lyons, Understanding Order Flow  The International Journal of Finance and Economics, forthcoming, 2006.

 

3.      International Financial Integration

a)      Capital Flows and Risk-Sharing

                                                  i.      Evans M and V. Hnatkovska,  “International Capital Flows Returns and World Financial Integration” mimeo, Georgetown, 2005

                                                ii.      Evans M and V. Hnatkovska, Solving General Equilibrium Models with Incomplete Markets and Many Assets mimeo, Georgetown, 2005.

                                              iii.      Backus D. and G. Smith, “Consumption and Real Exchange Rates in Dynamic Economies with Nontraded Goods”, Journal of International Economics, 25, 1993.

 

b)      International Portfolio Choice

                                                  i.      Hnatkovska, V.  Home Bias and High Turnover: Dynamic Portfolio Choice with Incomplete Markets

                                                ii.      Lewis K., "Puzzles in International Financial Markets" in Handbook of International Economics, Gene Grossman and Ken Rogoff, ed, North Holland, 1995 also NBER WP 4951;

                                              iii.      Baxter M, U. Jermann and R. King, “Nontraded Goods, Nontraded factors and International Nondiversification”, Journal of International Economics, April 1998, 211-229.

                                              iv.      Lewis K., "International Home Bias in International Finance and Business Cycles", NBER WP #6351, January 1998, or with the title ""Trying to Explain Home Bias in Equities and Consumption" Journal of Economic Literature 37, June 1999, 571-608.

                                                v.      Lewis K. (1996), "What can explain the apparent lack of consumption risk sharing?" Journal of Political Economy 104 (April): 267-97.

                                              vi.      Baxter M. and U. Jerman, 1997, "The international diversification puzzle is worse than you think", American Economic Review, 87(March) and the appendix.

                                            vii.      Tesar L. and I. Werner, 1995, "Home Bias and High Turnover", Journal of International Money and Finance 14 (August): 467-92  1995.

                                          viii.      Kehoe P. and F. Perri, "International Business Cycles with Endogenous Incomplete Markets", Econometrica, May 2002 70, p907-928.

 

c)       The Forward Discount Puzzle

                                                  i.      Backus D., S. Foresi, and C. Telmer, 1998. Affine models of currency pricing 

                                                ii.      Gourinchas P. and A. Tornell, Exchange Rate Puzzles and Distorted Beliefs, Journal of International Economics, December 2004, 64(2),pp 303-333.

                                              iii.      Fama, Eugene 1984. Forward and spot exchange rates. Journal of Monetary Economics, vol. 14, 319-338.

                                              iv.      Lewis K., 1989. Changing beliefs and systematic rational forecast errors with evidence from foreign exchange, American Economic Review 79: 621-36.

                                                v.      Froot K. and R. Thaler, 1990. Anomalies: Foreign Exchange. Journal of Economic Perspectives 4: 179-92.