Study-Unit Description

Study-Unit Description


CODE BKF5130

 
TITLE International Finance

 
UM LEVEL 05 - Postgraduate Modular Diploma or Degree Course

 
MQF LEVEL 7

 
ECTS CREDITS 5

 
DEPARTMENT Banking and Finance

 
DESCRIPTION The main theme of the unit is to evaluate the pricing and use of such financial instruments for institutions operating in an environment of fluctuating exchange rates, differential international rates of inflation, differing money market conditions and government regulation. Our focus throughout will be on interest rate and currency products rather than equity-related derivatives. While derivatives is one of the most mathematically sophisticated areas of finance, users of derivatives need to be able to explain the fundamental principles of derivative pricing and risk management in a conceptual manner without the use of advanced mathematical modeling. This unit provides a formal and rigorous approach to financial derivatives, yet also one which is intuitive and accessible without the use of advanced mathematics.

The unit will have a strongly applied orientation, and case study/problem solving material will be used whenever appropriate. The study-unit assumes that the student has a basic knowledge of the major international financial markets from previous courses.

Our focus throughout will be on interest rate and currency products rather than equity-related derivatives. While derivatives is one of the most mathematically sophisticated areas of finance, users of derivatives need to be able to explain the fundamental principles of derivative pricing and risk management in a conceptual manner without the use of advanced mathematical modeling. This unit provides a formal and rigorous approach to financial derivatives, yet also one which is intuitive and accessible without the use of advanced mathematics.

The unit will have a strongly applied orientation, and case study/problem solving material will be used whenever appropriate. The unit assumes that the student has a basic knowledge of the major international financial markets from previous units.

Study-unit Aims:

The aims of the study-unit are to assist the student in:
• Being able to critically appraise the real world relevance of current thinking on exchange rate determination.
• Being able to critically evaluate the existing thinking and evidence relating to certain major puzzles in exchange rate modelling: the determination, excess volatility and forward bias puzzles.
• Being able to critically evaluate the existing thinking regarding the nature and causes of currency and financial crises.

Learning Outcomes:

1. Knowledge & Understanding:

By the end of the study-unit the student will be able to:
1. Comprehend the institutional environment relating to currency markets and the classification of exchange rate regimes.
2. Comprehend, and be able to critically evaluate, the major existing theories of exchange rate determination and the empirical evidence relating to these theories.
3. Critically evaluate the impact of changes in the international financial environment for the potential to transmit financial crises across international boundaries.

2. Skills:

By the end of the study-unit the student will be able to:
1. Demonstrate an understanding of the importance of Exchange Rates in International Macroeconomic frameworks.
2. Obtain a solid knowledge on the latest financial theories of exchange rate determination.
3. Relate the consequences of exchange rate movements to portfolio and wealth management.

Main Text/s and any supplementary readings:


The reading list which will appear below is very extensive and clearly students will not be expected to read all the material in one semester. Do not be intimidated by this list. Guidance will be given during the lectures and on Blackboard as to the appropriate reading required to supplement the lecture material. We will add to the reading list as the module progresses.

Abbreviations:
    AER American Economic Review
    AFE Applied Financial Economics
    EJ Economic Journal
    JEL Journal of Economic Literature
    JEP Journal of Economic Perspectives
    JF Journal of Finance
    JFE Journal of Financial Economics
    JIE Journal of International Economics
    JIMF Journal of International Money and Finance
    JME Journal of Monetary Economics
    JMCB Journal of Money, Credit and Banking
    JPE Journal of Political Economy
    OEP Oxford Economic Papers
    QJE Quarterly Journal of Economic

Reading List

Main text:
No textbook covers all the material. However, two textbooks with good coverage are:

Main Text: Sarno, L. & Taylor, M. (2002) The Economics of Exchange Rates, Cambridge University Press.

Main Text: Copeland, L. (2008) Exchange Rates and International Finance, 5th edition, Pearson

1: FOREIGN EXCHANGE MARKET INSTITUTIONS AND TRADING ACTIVITY

Triennial Central Bank Survey: Foreign Exchange and Derivative Markets Activity in 2010, BIS, December 2010 (you may also wish to refer to the 2007 survey for comparison).

This course begins with some requisite institutional background on the eurocurrency market, including analysis of the key global interest rate, LIBOR. LIBOR, or the London Interbank Offer Rate, is the benchmark rate banks use when they offer to lend unsecured money to other banks in the London wholesale money market. LIBOR is calculated daily by Thomson Reuters on behalf of the British Bankers Association (“BBA”), and is arguably the most important interest rate in the world, as it is used to calculate the interest rates on the equivalent of hundreds of billions of dollars of corporate debt, mortgages and innumerable other loan products – including hundreds of trillions of dollars of derivative products. It is also the key interest rate referred to in discussions of covered and uncovered interest parity (see below). LIBOR is a “reference” rate, meaning it isn’t imposed on a borrower by any regulation or law.
Recently, accusations have emerged that certain bank’s have conspired in cartel-like fashion to “fix” or “manage” LIBOR. This has led to very high profile Antitrust Law case(s), which are still on-going in early 2012.
Preliminary References:
Harrington, John. (2005), “Detecting Cartels”, mimeo John Hopkins University.
Gyntelberg, J. and Wooldridge, P., (2008), Interbank rate fixings during the recent turmoil,” BIS Quarterly Review, March 2008.

2: EXCHANGE RATE REGIMES

The McKinnon paper below provides an overview of the evolution of exchange rate policy and exchange rate regimes from the gold standard to the modern era, after the breakdown of the Bretton Woods system of fixed exchange rates.

R.I. McKinnon, “The rules of the game: international money in historical perspective,” JEL, 31, (1993). 1-44.

The papers and book below contain the major current approaches to classifying exchange rate regimes. The Klein/Shambaugh book provides an up-to-date perspective, Rose a critique.

IMF, Annual Report on Exchange Rate Arrangements and Exchange Restrictions (AREAER), various issues.
K. Habermeier et al., “Revised System for the Classification of Exchange Rate Arrangements,” IMF working paper WP/09/211, (2009), available from IMF website: www.imf.org
E. Levy-Yeyati and F. Sturzenegger, “To Float or Fix,” AER, 93(4), (2003), 1173-1193.
C.M. Reinhart and K.S.Rogoff, “The Modern History of Exchange Rate Arrangements: A Reinterpretation,” QJE, 119, (2004), 1-48.
J. Stambaugh, “The Effect of Fixed Exchange Rates on Monetary Policy,” QJE, 119, (2004), 301-352.
L. Copeland ERIF, Chap. 1, 2.
M.Klein and J.C.Shambaugh, Exchange rate regimes in the modern era, (2010), MIT Press.
A.Rose, “Exchange Rate Regimes in the Modern Era: Fixed, Floating and Flaky,” working paper, Haas School of Business, June 2011, forthcoming JEL.

Read the McKinnon article for the formative assessment on this topic. The other papers provide alternatives to the “de facto” IMF AREAER system of classifying exchange rate regimes. The Habermeier et al. paper discusses some recent revisions to the IMF system.

3: PURCHASING POWER PARITY (PPP) AND THE REAL EXCHANGE RATE

This lecture begins with discussion of the “Law of One Price” formulated around the Big Mac index, and proceeds to analyse both absolute and relative versions of purchasing power parity theories. Then we extend this PPP approach by decomposing price levels into their constituent traded and non-traded goods components. This decomposition is subsequently used to analyse the determinants of variations in the real (equilibrium) exchange rate and a countries international competitiveness.

L.Sarno and M.Taylor, ST, Chap 3, esp pp. 51- 59.
L. Copeland ERIF, Chap. 2.
M. Taylor, “Real Exchange Rates and Purchasing Power Parity: mean-reversion in economic thought,” AFE, 16, (2006), pp. 1-17.
K. Rogoff, “The Purchasing Power Parity Puzzle,” JEL, 34, (1996), pp. 647-668.
I. Drine, and Rault, “Can the Balassa – Samuelson theory explain long-run real exchange rate movements in OECD countries?” AFE, 15, (2005), pp. 519-530.
H. Faruqee, “Long-run determinants of the real exchange rate: a stock-flow perspective,” IMF Staff Papers, 42:1, (1995), pp. 80-131.
P.R. Lane, and G.M. Milesi-Ferretti, “Long-run determinants of the Irish real exchange rate,” Applied Economics, 34, (2002), pp. 549-553.
R. MacDonald, “What determines real exchange rates? The long and short of it,” Journal of International Financial Markets, Institutions and Money, 8, (1998), pp. 117-153.

4: STRUCTURAL MODELS OF EXCHANGE RATE DETERMINATION

Here we look at the two main classes of Asset-Based/Structural Models of Exchange Rate Determination, namely the family of Monetary and Portfolio Balance Models. Most textbooks in International Finance cover these topics well, although they often go into more detail in terms of the economics of the models (especially the portfolio balance model) than we need on this module.

L. Copeland ERIF, Chap. 5, 7, 8.
L. Sarno and M.Taylor, ST, Chap 4. pp.97-120.
M.P.Taylor, “The economics of exchange rates.” JEL, 33, (1995), 13-47, section III.

The four papers below are challenging. There is no need to read them for examination purposes, although they are classics in the field, and provide the original source material in many cases. They are included as a challenge to the more adventurous types amongst you.

J.A. Frenkel, “A monetary approach to the exchange rate: doctrinal aspects and empirical evidence”, Scandinavian Journal of Economics, 78, (1976), pp. 200-224.
R. Dornbusch, “Expectations and Exchange Rate Dynamics”, JPE, 84, (Dec. 1976), pp. 1161-76.
H.G. Johnston, “The monetary approach to the balance of payments: a non-technical guide”, JIE, 7, (1977), pp.251-268.
J.A. Frankel, “On the Mark: A Theory of Exchange Rates based on Real Interest Differentials”, AER, 69, (Sept. 1979), pp. 610-622.

The two papers below are interesting retrospective overviews of the relevance of these structural models:

A. Isaac and S. de Mel, “The real-interest differential model after 20 years”, JIMF, 20, (August 2001), pp. 473-495.
K.Rogoff, “Dornbusch’s Overshooting Model after Twenty-Five Years,” IMF Staff Papers, 49, (2002), pp. 1-35, available from IMF website: www.imf.org

5: EMPIRICAL VALIDATION: THE DISCONNECT AND EXCESS VOLATILITY EXCHANGE RATE PUZZLES AND THE MEESE-ROGOFF STUDY

This lecture and reading looks at the empirical evidence relating to structural models. The textbook is a very good summary, without going into all the detail provided in the lecture notes.

L.Sarno and M.Taylor, ST, Chap 4. pp.123-127; 132-137.

The classic out-of sample exchange rate forecasting paper is:

R. Meese and K. Rogoff, “Empirical Exchange Rate Models of the Seventies,” JIE, 14, (1983), pp.3-24.

More recent evidence can be found in:

Y-W Cheng et al., “Empirical Exchange Rate Models of the nineties: Are any fit to survive?” JIMF, 24, (2005), pp.1150-1175.
A.Abhyankar et al., “Exchange Rates and Fundamentals: Evidence on the Economic Value of Predictability”, JIE, 66, (2005), pp.325-348.

Other papers you may wish to consult in order to look briefly at a summary of their findings are given below. The Flood and Rose paper is very good on the excess volatility puzzle and regime change issues. You should relate this discussion to the lecture in week 1 where we introduced the literature on exchange rate regimes .

R. Flood and A. Rose, “Understanding Exchange Rate Volatility without the Contrivance of Macroeconomics,” EJ, 109, (November 1999), F660-672.
A.Rose, “Exchange Rate Regimes in the Modern Era: Fixed, Floating and Flaky,” working paper, Haas School of Business, June 2011, forthcoming JEL. (revisited – see section 1)
N. Mark, “Exchange Rates and Fundamentals: Evidence on long horizon predictability,” AER, 85, (1995), pp.201-18.
N. Mark and D.Sul, “Nominal Exchange Rates and Monetary Fundamentals. Evidence from a small post-Bretton Woods panel,” JIE, 53, (2001), 29-52.
L. Kilian and M.P. Taylor, “Why is it so difficult to beat the random walk forecast of exchange rates?” JIE, 60, (2003), pp.85-107.

6: CURRENT ACCOUNT IMBALANCES, CURRENCY WARS, THE EUROZONE CRISIS AND THE GLOBAL EXCHANGE RATE SYSTEM

This lecture relates the preceding course material to recent policy issues in global financial markets, including a selective look at recent financial crises. The lecture provides an overview of the current state of the global monetary system and exchange rate policy. It begins by looking at current account (CA) imbalances using the US CA deficit as a case study. We link this issue into the pattern of global capital flows over the past 20 years and the potential for financial crisis this engenders. What is responsible for these imbalances? We examine this issue with reference to both savings patterns, and the exchange rate policy of certain key players in the global financial system, namely the US and China. We move on to consider how international exchange rate policy can also contribute to global imbalances and has led to the hoarding of USD in the form of FOREX reserves by many emerging market economies. Finally, proposals for reform of the global exchange rate system are briefly discussed, with particular attention paid to proposals to replace or supplement the USD as a reserve currency.

These issues are very topical, and the debates have been conducted in the pages of both academic journals and the informed press. The readings reflect this fact.

R. McKinnon, “Why China should keep its dollar peg,” International Finance, 10, (2007), 1, pp. 43-70.
N. Roubini, “Why China should abandon its dollar peg,” International Finance, 10, (2007), 1, pp. 71-89.
“Beyond Bretton Woods 2,” The Economist, Novermber 6th, 2010, pp. 85-87.
“Fumbling towards a truce,” The Economist, October 16th, 2010, pp. 87-88.
“Flood barriers,” The Economist, October 9th, 2010, pp. 100.
“A Mao in every pocket,” The Economist, September 25th, 2010, pp. 89-90.
“Speak less softly, carry a stick,” The Economist, September 25th, 2010, pp. 90.
“Trial of strength,” The Economist, September 25th, 2010, pp. 90-92.
“Fixing Europe’s single currency,” The Economist, September 25th, 2010, pp. 85-87.
“Standard solution,” The Economist, September 25th, 2010, pp. 87.

The literature on the eurozone and the eurozone crisis is vast. Once more we will be focussing upon recent analysis of the Eurozone crisis from the informed press (Economist, FT, and BBC). Much of the eurozone crisis has an inherent political economy nature to it. The lecture will be focussing on the issues which are most directly and appropriately addressed in relation to the themes and topics we have covered in this course to date.

For the seminal work on optimum currency areas see the Mundell and McKinnon papers below. These papers are also discussed in the texts as indicated.

R. Mundell, “A theory of optimum currency areas,” AER, 51, (1961), pp.509-17.
R.I. McKinnon, “Optimum Currency Areas,” AER, 53, (1963), pp.717-65.
L.Sarno and M.Taylor, ST, Chap 6, esp pp.170-177.
L. Copeland ERIF, Chap. 11.

Some recent reading from the Economist is given below. You should check weekly for up-dates to this information as the crisis proceeds. These are interesting times we live in.

The www.bbc.co.uk website is very informative. Search for a specific topic
“The Eurozone is in intensive care,” The Economist, September 17th, 2011
“The euro-zone crisis: Fighting for its life,” The Economist, September 17th 2011
“Europe’s currency crisis: How to save the euro,” The Economist, September 17th 2011
“Germany’s euro question,” The Economist, September 10th 2011
“European leaders need to think and act more boldly to stem the euro crisis,” The Economist, August 20th 2011

7: THE MICROSTRUCTURE APPROACH TO EXCHANGE RATE DETERMINATION

Here we look at the most recent approach to Exchange Rate Determination, which is known as the Microstructure Approach. This approach is relatively new and the literature is still evolving at a rapid pace, so textbook coverage of some of this material is quite poor or in many cases non-existent.

The papers below provide excellent overviews of the early Microstructure Literature and the importance of Order Flow in this type of modelling. The Lyons book is excellent but rather too detailed for our purposes. The Sarno and Taylor text is good on the institutional rationale for this approach. Their survey is also excellent but not an easy read. I particularly like the Rime and Sojli paper for a succinct and simple introduction to the topic.

M.D.Evans, “Foreign Exchange Market Microstructure”, mimeo, 2005. Available on the course website.
L. Sarno and M. Taylor, The Microstructure of the Foreign Exchange Market: A Selective Survey of the Literature, Princeton Studies in International Economics (formerly Princeton Studies in International Finance), 89, 2001.
L.Sarno and M.Taylor, ST, Chap 9. pp.264-278 (also covers Chartism).
R.K.Lyons, The Microstructure Approach to Exchange Rates, The MIT Press, 2001.
D.Rime and E. Sojli, Order Flow Analysis of Exchange Rates, Norges Bank Economic Bulletin, 77, 3, (2006), pp. 147-152.

The papers below contain important empirical insights on exchange rate determination, the disconnect puzzle and hybrid Microstructure Models. The Engel and West paper is particularly important in the recent literature, both for rationalising the Meese-Rogoff findings, and for providing a way forward in empirical modelling. The other papers provide recent evidence on the relationship between macroeconomic information, order flow and exchange rate forecasting. We will be summarising certain their findings in the lectures.

C.Engel and K.West, “Exchange Rates and Fundamentals”, JPE, 113, (2005), pp. 485-517.
M. Evans and R.Lyons, “Order Flow and Exchange Rate Dynamics”, JPE, 110, (2002), pp. 170-180.
K. Froot and T. Ramadorai, “Currency Returns, Intrinsic Value and Institutional Order Flows”, JF, (2005), pp. 1535-1565.
M. Evans and R. Lyons, “Meese-Rogoff redux: Micro-Based Exchange Rate Forecasting”, AER, 95, (2005), pp. 405-413.
M. Evans and R. Lyons, “How is macro news transmitted to exchange rates?” JFE, 88, (April 2008), pp. 23-50.
D. Rime et al., “Exchange rate forecasting, order flow and macroeconomic information”, JIE, 80, (2010) pp. 72-88.

The paper below contains an interesting perspective Exchange Rate Volatility puzzle and Hybrid Microstructure Models. We will again summarise their findings in the lectures.

W. Killeen, R.K.Lyons and M.Moore, “Fixed versus Flexible: Lessons from EMS Order Flow,” JIMF, 25, (2006), 551-579.

8: FOREIGN EXCHANGE MARKET EFFICIENCY AND THE FORWARD BIAS PUZZLE

In an efficient speculative market, prices should fully reflect information available to market participants, and it should be impossible for a trader to earn excess returns to speculative activity. It should also be impossible to make profits from pure arbitrage trades. This lecture defines efficiency in the foreign exchange market. The size and liquidity of this market suggest that it should be among the most efficient of all markets. We utilise the concepts of covered and uncovered interest parity to explore this issue further. We also examine the empirical evidence testing efficiency in the FOREX market, in the process uncovering yet another exchange rate puzzle, the forward premium or bias puzzle.

L.Sarno and M.Taylor, EER, Chap 2, esp pp.5-20, pp. 28-35.
L. Copeland ERIF, Chap. 3 (not 3.6), 12.
D. Longworth, “Testing the Efficiency of the Canadian – US Exchange Market under the Assumption of No Risk Premium”, JF, 36 (1981), pp. 43-49.
R. Huisman et al., “Extreme support for uncovered interest parity,” JIMF, 17 (1998), pp.211-228.
K. Froot and R. Thaler, “Foreign Exchange,” JEP, 4 (Summer 1990), pp. 179-92.
Engel, C., “The Forward Discount Anomaly and the Risk Premium: A Survey of Recent Evidence,” JEF, 3, (1996), pp. 123-192.
Q. F. Akram et al., ”Arbitrage in the Foreign Exchange market: Turning on the microscope,” JIE, 76, (2008), pp. 237-253.
N.Baba and F.Packer, “Interpreting deviations from covered interest parity during the financial market turmoil of 2007-2008,” BIS Working Paper No. 267, (December 2008).

The reading which follows provides a discussion of some of the early attempted resolutions to the forward premium puzzle, invoking peso problem and learning-related explanations of the bias. It also includes early literature analysing the properties that a foreign exchange market risk premium must satisfy in order to provide an adequate explanation of the forward bias/puzzle.

E. Fama, “Forward and Spot Exchange Rates”, JME, 14 (1984), pp. 319-28.
W.S Krasker, “The “Peso Problem” in Testing the Efficiency of the Foreign Exchange Market”, JME, 6, (1980), pp.269-276.
R.Clarida and M.Taylor, “The Term Structure of Forward Exchange Premiums and the Forecastability of Spot Exchange Rates”, Review of Economics and Statistics, 79, (1997), pp.353-361.
R. MacDonald and T. Torrance, “Expectations Formation and Risk in Four FOREX Markets”, OEP, 42 (1990), pp. 544-561.
J.A.Frankel and K.Froot, “Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations”, AER, 77, (1987), pp.133-153.
R. MacDonald and M. Moore, “The spot-forward relationship revisited: an ERM perspective,” JIFMIM, 11, (April 2001), pp. 29-52.
K.K. Lewis, “Can Learning Affect Exchange Rate Behaviour? The Case of the Dollar in the Early 1980s“, JME, 23, (1989), pp.79-100.

A large and important literature has recently emerged arguing that risk premium must be at the heart of any explanation of the forwrad bias puzzle. The reading below take you through many of the recent developments in this strand of the literature.

Affine Models of the Term Structure and Currencies (Pricing Kernel Approaches)

D. Backus, S. Foresi and C. Telmer, “Affine Term Structure Models and the Forward Premium Anomaly”, JF, 56, (2001), pp. 279-304.
Brennan, M. and Yihong Xia, “International Capital Markets and Foreign Exchange Risk,” Review of Financial Studies, 19, No. 3, (2006), pp. 753-795.

Recent Extensions of the new approaches to currency risk premium

L.Sarno, P.Schneider, and C. Wagner, “Properties of Foreign Exchange Risk Premiums,” working paper, Cass Business School, 2010.
G. Bakshi, P. Carr, and L. Wu, “Stochastic Risk Premiums: Stochastic Skewness in Currency Options, and Stochastic Discount Factors in International Economies,” JFE, 87, (2007), pp. 132–156.
R. Bansal, and I. Shaliastovich, “A Long-Run Risks Explanation of Predictability Puzzles in Bond and Currency Markets,” Working Paper, Duke University, 2008.
Dong, Sen, “Macro Variables, Term Structure of Interest Rates, and Exchange Rates,” Columbia Business School working paper, 2006.
J. Graveline, “Exchange Rate Volatility and the Forward Premium Anomaly,” University of Minnesota working paper, 2006.
H. Lustig, N. Roussanov., and A. Verdelhan, “Common Risk Factors in Currency Markets,” Boston University working paper, 2008.
H. Lustig, and A. Verdelhan, “The Cross Section of Foreign Currency Risk Premia and Consumption Growth Risk”, AER, 97, (2007), pp. 90-116.
[C. Burnside, “The Cross-Section of Foreign Currency Risk Premia and US Consumption Growth: A Comment”, NBER Working Paper, No. 13129, 2007. Lustig Verdelhan, “Note on The Cross Section of Foreign Currency Risk Premia and Consumption Growth Risk”, NBER Working Paper, No. 13812, 2008. Burnside’s (2007) paper criticizes the original Lustig and Verdelhan (2007, AER) paper. This 2008 paper is the response to that critique.]
A. Verdelhan, “A Habit Based Explanation of the Exchange Rate Risk Premium”, JF, 65, (2010), pp.143-145.

9: CURRENCY CRISES

The final two decades of the twentieth century and the first decade of the twenty-first bore witness to a number of currency and financial crises impacting upon international financial markets. Moreover, the economic circumstances of the countries which suffered financial crises and attacks on their currencies from international speculators were very diverse. Commentators often subsume this diversity into three distinct strands for analysis. First, there were crises in a number of Latin American economies, where economists quickly pointed out the inconsistencies between the stance of domestic macroeconomic policy and a commitment to a fixed exchange rate. Second, the circumstances encountered by the more developed economies of Europe, where there appeared to be no such inconsistencies but rather a temptation on the part of the authorities to pursue more expansionary domestic policy . Third, the situation in the so-called “tiger” economies of East Asia, where prior to the crisis emerging the circumstances appeared to be very strong and macroeconomic developments entirely in keeping with the desire of these economies to maintain a fixed exchange rate. Moreover, in all cases there appears to be a distinction to be made between crises which spread “contagiously” from their country of origin to impact other economies and crises which were more contained. This topic analyses these developments in more detail. We will also address current developments in the Eurozone as this evolves. For a superb analysis of financial crisis through the years, see:

C. Reinhart and K.Rogoff, This Time is Different, 2010, Princeton University Press.

Exchange Rate Regimes and Currency Crises: The various Generations of Models
L.Sarno and M.Taylor, EER, Chap 8.
P. Krugman, “A Model of Balance-of-Payments Crises”, JMCB, 11, (1979), pp. 311-325.
P. Krugman, “Target Zones and Exchange Rate Dynamics”, QJE, 51, (1991), pp. 669-682.
M. Obstfeld, “Rational and self-fulfilling balance of payments crises”, AER, 76, (1986), pp. 72-81.
M. Obstfeld, “Models of currency crises with self-fulfilling features”, European Economic Review, 40, (1996), pp. 1037-1047.
M. Dooley, “A Model of Crises in Emerging Markets”, EJ, 110, (2000), pp.256-272. An earlier version is NBER Working paper No. 6300, (1997), available on NBER website (see pages 1/2 of this reading list).
R.McKinnon and H.Pill, “International Overborrowing: A Decomposition of Credit and Currency Risk”, World Development, 26, (1998), pp.1267-1282.
A. Velasco and R. Chang, “A Model of Financial Crisis in Emerging Markets,” QJE, (2002).

Empirical Contributions
O. Jeanne, “Are currency crises self-fulfilling?”, JIE, 43, (1997), pp. 263-286.
G. Kaminsky et al., “Leading Indicators of Currency Crises”, IMF Staff Papers, 45, (March 1998), pp. 1-48. available from IMF website: www.imf.org
I. Goldfajn and R. Valdes, “Are Currency Crises Predictable?” European Economic Review, 42, (1998), pp.873-885.
P. Benigno and A. Missale, “High Public Debt in Currency Crises: Fundamentals versus Signaling effects,” JIMF, 23, (2004), pp.165-188.

Selected Critical Perspectives
R. Flood and N. Marion, “Perspectives on the Recent Currency Crisis Literature,” International Journal of Finance and Economics, 4, (January 1999), pp.1-26.
G. Kaminsky and C. Reinhardt, “The Twin Crises: The Causes of Banking and Balance of Payments Problems,” AER, 89, (June 1999), pp.473-500.
R. Flood and N. Marion, “A model of the joint distribution of banking and currency crises,” JIMF, 23, (2004), pp. 841-865.
J. Sachs et al., “Financial Crises in Emerging Markets: The Lessons of 1995”, Brookings Papers on Economic Activity, No. 1, (1996), pp. 147-225.
R. Flood and N. Marion, “Self-Fulfilling Risk Predictions: An Application to Speculative Attacks”, JIE, 50, (2000), pp. 245-268.
I. Pastine, “Speculation and the desire to abandon a fixed exchange rate regime”, JIE, 57, (2002), pp.197-229.
B. Guimarães, “Dynamics of Currency Crises with Asset Market Frictions”, 52, JIE, (2006), pp.141-158.
R. Flood and O. Jeanne, “An Interest Rate Defence of a Fixed Exchange Rate”, JIE, (2005), pp. 471-484.
X. Gabaix and E. Farhi, 2008, "Rare Disasters and Exchange Rates,” Working Paper, NYU Stern School.

Currency Crises: Spillovers and “Contagion”
G. Kaminsky et al., “The Unholy Trinity of Financial Contagion.” JEP, 17 (4), (2003), pp.51-74.
F. Caramazza et al., “International Financial Contagion in Currency Crises,” JIMF, 23, (2004), pp.51-70.
B. Candelon et al., “Measuring common cyclical features during financial turmoil: evidence of interdependence not contagion”, JIMF, 24, (2005), 1317-1334.
G. Corsetti et al., “Some contagion, some interdependence: more pitfalls in tests of financial contagion”, JIMF, 24, (2005), 1177-1199.
G. Kaminsky and C. Reinhart. “On crises, contagion, and confusion.” JIE, 51 (1), (2000), pp.145-168.
C. Van Rijckeghem and B.Weder, “Sources of contagion: is it finance or trade?” JIE, 54, (August 2001), 293-308.
K. Forbes, “The Asian flu and Russian virus: the international transmission of crises in firm-level data,” JIE, 63, (2004), pp. 59-92.
B. Eichengreen et al., “Contagious Currency Crises; First Tests”, Scandinavian Journal of Economics, 9, (1996), pp. 463-484.
S. Claessens and K. Forbes (Ed.), International Financial Contagion, Amsterdam, Kluwer Academic Press, 2001.
L. Kodres and M. Pritsker, “A Rational Expectations Model of Financial Contagion,” JF, 57, (2002), pp. 769-800.
J. Tirole, Financial Crises, Liquidity, and the International Monetary System, Princeton University Press, 2002.

We will cover the topics below only if time permits.
Investor Behaviour and dynamics of Financial Information flows: The Role of Local and Foreign Investors in Crisis Propagation.
J. A. Frankel and S. L. Schmukler, “Country fund discounts and the Mexican crisis of December 1994: Did local residents turn pessimistic before international investors?“ Open Economies Review, 7, (1996), Supplement 1, pp.511-34.
J. A. Frankel and S. L. Schmukler, “Country Funds and Asymmetric Information“, World Bank Policy Research Working Paper #1886, (1998), available at http://wbln0018.worldbank.org/research/workpapers.nsf/.
K.A. Froot and P. O’Connell, “The Risk Tolerance of International Investors,“ NBER Working Paper 10157, (December 2003).
K.A. Froot, P. O’Connell and M.Seasholes, “The portfolio flows of international investors,“ JFE, 59, (2001), pp.151-193.
M. C. Lee, A. Shleifer, and R. H. Thaler, “Investor Sentiment and the Closed-End Fund Puzzle“, JF, 46, (1991), pp. 75-109.
W. Kim and S-J Wei, “Foreign Portfolio Investors before and during a crisis,“ JIE, 56, (January 2002), pp. 77-96.
M. Bowe and D. Domuta, “Foreign Investor Behaviour and the Asian Financial Crisis,“ JIFMIM, 11, (September 2001), pp. 395-422.
Investor Herding during Financial Crises.
G. Kaminsky et al., “Managers, investors and crises: mutual fund strategies in emerging markets,“ JIE, 64, (2004), pp. 113-134.
H. Cho et al., “Do foreign investors destabilize stock markets? The Korean experience in 1997,“ JFE, 54, (1999), pp. 227-264.
M. Bowe and D. Domuta, “Investor Herding during Financial Crisis: a clinical study of the Jakarta Stock Exchange,” Pacific-Basin Finance Journal, 12, (2004), pp. 387-418.

 
STUDY-UNIT TYPE Lecture

 
METHOD OF ASSESSMENT
Assessment Component/s Sept. Asst Session Weighting
Assignment Yes 25%
Examination (3 Hours) Yes 75%

 
LECTURER/S Michael Bowe

 

 
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