Professor Robert J. Hodrick Spring Semester 2012 Uris 414 212-854-3413 [email protected]
B9311-13 Ph.D. Seminar in International Finance
Course Outline and Reading List
The course covers current research topics in international finance. An introduction to the subject at the MBA level and additional background information can be found in
Geert Bekaert and Robert J. Hodrick, (B&H), 2012, International Financial Management, 2nd Edition. Upper Saddle River, NJ: Pearson-Prentice Hall, which is available from the bookstore.
The readings marked with an (*) are required. All other readings are supplementary. PDF files of the required readings will be posted on the class web site.
The only requirement for the course is a paper, which will ideally lead to additional research in the area. Acceptable paper topics include a critical survey of two or three papers, the replication and extension of an empirical paper, or original theoretical or empirical research.
I am on campus most weekdays, so please stop by if you have a question. I am also usually free right after class. If you would like to schedule a formal appointment, please send me an e-mail.
January 25, Class 1: Foreign Exchange Markets and Interest Rate Parity
B&H Chapters 2-6
*Sager, Michael J. and Mark P. Taylor, 2006, “Under the Microscope: The Structure of the Foreign Exchange Market,” International Journal of Finance and Economics 11, pp. 81- 95. *Baba, N., and F. Packer, 2009, “Interpreting Deviations from Covered Interest Parity during the Financial Market Turmoil of 2007–08,” Journal of Banking & Finance 33, 1953-1962.
*Baba, N., and F. Packer, 2009, “From Turmoil to Crisis: Dislocations in the FX Swap Market Before and After the Failure of Lehman Brothers,” Journal of International Money and Finance 28, 1350-1374.
Baba, N., F. Packer, and T. Nagano, 2008, “The spillover of money market turbulence to FX swap and cross currency markets.” BIS Quarterly Review, March 2008 pp73-86.
McCauley, R. and P. McGuire, 2009, “Dollar Appreciation in 2008: Safe Haven, Carry Trades, Dollar Shortage, and Overhedging,” BIS Quarterly Review, December 2009.
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Evans, Martin D.D. and Richard K. Lyons, 2006, “Understanding Order Flow,” International Journal of Finance and Economics 11, pp. 3-23.
Osler, Carol L., 2006, “Macro Lessons from Microstructure,” International Journal of Finance and Economics 11, pp. 55-80.
Andersen, Torben, Tim Bollerslev, Francis X. Diebold and Clara Vega, 2003, “Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange Markets,” American Economic Review, pp. 38-62.
Sager, Michael J. and Mark P. Taylor, 2008, “Commercially Available Order Flow Data and Exchange Rate Movements: Caveat Emptor” Journal of Money, Credit and Banking 40, 583-625.
Phylaktis, Kate, and Long Chen, 2010, “Asymmetric Information, Price Discovery, and Macroeconomic Announcements in the FX Market: Do Top Trading Banks Know More?” International Journal of Finance and Economics 15, 228-246.
February 1, Class 2: Purchasing Power Parity, Real Exchange Rates, and Exchange Rate Pass-Through
B&H Chapters 8-9
*Gopinath, Gita, Pierre-Olivier Gourinchas, Chang-Tai Hsieh, and Nicholas Li, 2011, “International Prices, Costs, and Markup Differences,” American Economic Review 101, 2450-86.
*Nakamura, Emi and Dawit Zerom, 2010, “Accounting for Incomplete Pass-Through,” Review of Economic Studies, 77(3), 1192-1230.
Nakamura, Emi and Jόn Steinsson, 2012, “Lost in Transit: Product Replacement Bias and Pricing to Market,” forthcoming American Economic Review.
Broda, Christian and David Weinstein, 2008, “Understanding International Price Differences Using Barcode Data,” NBER Working Paper No. 14017.
Gopinath, Gita, and Oleg Itshhoki, 2009, “Frequency of Price Adjustments and Pass-Through,” Quarterly Journal of Economics forthcoming.
Gopinath, Gita, Oleg Itshhoki, and Roberto Rigobon, 2010, “Currency Choice and Exchange Rate Pass-Through,” American Economic Review 100, 304-336..
Nakamura, Emi, 2008, “Pass-Through in Retail and Wholesale,” American Economic Review, 98, 430-437
Chong, Yanping, Òscar Jordà, and Alan Taylor, 2010, “The Harrod-Balassa-Samuelson Hypothesis: Real Exchange Rates and their Long-Run Equilibrium,” International Economic Review, forthcoming.
Chen, Lein Lein, and John Devereux, 2003, “What Can US City Price Data Tell Us about Purchasing Power Parity? Journal of International Money and Finance 22, 213-238.
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Engel, Charles and John Rogers, 1996, "How Wide is the Border?" American Economic Review, 86, 1112-1125.
Parsley, David and Shang-Jin Wei, 2001, “Explaining the Border Effect: The Role of Exchange Rate Variability, Shipping Costs, and Geography,” (with Shang-Jin Wei), Journal of International Economics 55, No. 1, pp. 87-106.
Parsley, David and Shang-Jin Wei, 2007, “A Prism into the PPP Puzzles: The Micro-Foundations of Big Mac Real Exchange Rates,” Economic Journal 117, 1336–1356.
Froot, Ken and Ken Rogoff, 1995, "Perspectives on PPP and Long-Run Real Exchange Rates," in Handbook of International Economics, vol. 3, Grossman and Rogoff (eds.), Elsevier Science Publishers.
Imbs, Jean, Haroon Mumtaz, Morten O. Ravn and Hélène Rey, 2005, “PPP Strikes Back: Aggregation Bias and the Real Exchange Rate,” Quarterly Journal of Economics 120, 1- 43.
Devereux, Michael and Charles Engel, 2007, “Expenditure Switching versus Real Exchange Rate Stabilization: Competing Objectives for Exchange Rate Policy,” Journal of Monetary Economics 54, pp. 2346-2374.
Kim, Jaebeom, Masao Ogaki, and Minseok Yang, 2007, “Structural Error Correction Models: A System Method for Linear Rational Expectations Models and an Application to an Exchange Rate Model,” Journal of Money, Credit and Banking 39, pp. 2057-2075.
Dornbusch, Rudiger, 1987, “Exchange Rates and Prices,” American Economic Review 77, 93- 106.
February 8, Class 3: Speculation and the Forward Market: The Unbiasedness Hypothesis and the Carry Trade
B&H Chapter 7
*Ang, Andrew and Joseph Chen, 2010, “Yield Curve Predictors of Foreign Exchange Returns,” manuscript, Columbia Business School.
*Jordà, Òscar and Alan Taylor, 2009, “The Carry Trade and Fundamentals: Nothing to Fear but FEER Itself” NBER Working Paper 15518.
Bilson, John F. O., 1981, “The Speculative Efficiency Hypothesis,” Journal of Business 54, 435- 451.
Fama, Eugene, 1984, “Forward and Spot Exchange Rates,” Journal of Monetary Economics, pp. 319-338.
Berge, Travis, Òscar Jordà, and Alan Taylor, 2010, “Currency Carry Trades,” International Seminar on Macroeconomics 2010, NBER, forthcoming.
Hodrick, Robert J., and Lars Peter Hansen, 1980, “Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis,” Journal of Political Economy 88, 829-853.
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Hodrick, Robert J., and Sanjay Srivastava, 1987, “Foreign Currency Futures,” Journal of International Economics 22, 1-24.
Bekaert, Geert and Robert J. Hodrick, 1993, "On Biases in the Measurement of Foreign Exchange Risk Premiums," Journal of International Money and Finance 12, pp. 115-138.
Bekaert, Geert and Robert J. Hodrick, 2001, “Expectations Hypotheses Tests,” Journal of Finance 56, pp. 1357-1394.
Cornell, Bradford, 1989, "The Impact of Data Errors on Measurement of the Foreign Exchange Risk Premium," Journal of International Money and Finance 8, pp.147-157.
Froot, Kenneth, and Richard Thaler, 1990, “Anomalies: Foreign Exchange,” Journal of Economic Perspectives 4, 179-192.
Bossaerts, Peter and Pierre Hillion, 1991, "Market Microstructure Effects of Government Intervention in the Foreign Exchange Market," Review of Financial Studies 4, No. 3, pp. 513-541.
Mark, Nelson and Young-Kyu Moh, 2007, “Official Intervention and the Forward Premium Anomaly,” Journal of Empirical Finance, 14, 499-522.
Sercu, Piet. and Martina Vandebroek, 2005, “What UIP Tests on Extreme Samples Reveal about the Missing Variable,” Journal of International Money and Finance 24, 8, 1237-1260.
Clarida, Richard H., and Mark P. Taylor, 1997, “The Term Structure of Forward Exchange Premia and the Forecastability of Spot Exchange Rates: Correcting the Errors” Review of Economics and Statistics 353-361.
Clarida, Richard H., Lucio Sarno, Mark P. Taylor, and Giorgio Valente, 2003, “The Out- of-Sample Success of Term Structure Models as Exchange Rate Predictors: A Step Beyond,” Journal of International Economics 60, 61-83.
Frankel, Jeffrey and Jumana Poonawala, 2010, “The Forward Market in Emerging Currencies: Less Biased Than in Major Currencies,” Journal of International Money and Finance 29, 585-598.
Frankel, Jeffrey A. and Kenneth A. Froot, 1987, “Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations,” American Economic Review 77, 33-153.
Froot, Kenneth A. and Jeffrey A. Frankel, 1989, “Forward Discount Bias: Is it an Exchange Risk Premium?” Quarterly Journal of Economics 104, 139-161.
Bansal, Ravi and Magnus Dahlquist, 2000, “The Forward Premium Puzzle: Different Takes from Developed and Emerging Economies,” Journal of International Economics 51, pp. 115- 144.
Bekaert, Geert, Min Wei and Yuhang Xing, 2007, “Uncovered Interest Rate Parity and the Term Structure,” Journal of International Money and Finance 26, 1038-1069.
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Boudoukh, Jacob, Matthew Richardson and Robert Whitelaw, 2006, “The Information in Long- Maturity Forward Rates: Implications for Exchange Rates and the Forward Premium Anomaly,” NYU Stern Working Paper.
Della Corte, Pasquale, Lucio Sarno, and Ilias Tsiakas, 2010, “Spot and Forward Volatility in Foreign Exchange,” Journal of Financial Economics, forthcoming.
Pojarliev, Momtchil, and Richard M. Levich, 2008a, “Do Professional Currency Managers Beat the Benchmark?” Financial Analysts Journal 64.
Pojarliev, Momtchil, and Richard M. Levich, 2008b, “Trades of the Living Dead: Style Differences, Style Persistence and Performance of Currency Fund Managers?” NBER Working Paper No. 1435.
Levich, Richard M., and Momtchil Pojarliev, 2009, “Detecting Crowded Trades in Currency Funds,” manuscript NYU Stern School.
February 15, Class 4: Testing for Time Varying Risk Premiums
*Burnside, Craig, Martin Eichenbaum, and Sergio Rebelo, 2011, “Carry Trade and Momentum in Currency Markets,” Annual Reviews of Financial Economics 3, 511-536.
*Burnside, Craig, Martin Eichenbaum, Isaac Kleshchelski, and Sergio Rebelo, 2010, “Do Peso Problems Explain the Returns to the Carry Trade,” Review of Financial Studies, 853-891.
*Lustig, Hanno N., Nikolai L. Roussanov, and Adrien Verdelhan, 2011, “Common Risk Factors in Currency Markets,” forthcoming Review of Financial Studies.
*Ranaldo, Angelo and Paul Söderllind, 2010, “Safe Haven Currencies,” Review of Finance 14, 385-407.
Farhi, Emmanuel, Samuel Fraiberger, Xavier Gabaix, Romain Ranciere, and Adrien Verdelhan, 2009, “Crash Risk in Currency Markets,” manuscript NYU Stern School.
Farhi, Emmanuel, and Xavier Gabaix, 2009, "Rare Disasters and Exchange Rates,” manuscript NYU Stern School.
Burnside, Craig, 2009, “The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk: A Comment,” manuscript, Duke University.
Brunnermeier, Markus K., Stefan Nagel, and Lasse Pedersen, 2009, “Carry Trades and Currency Crashes,” Macroeconomics Annual 2008, Chapter 5.
Burnside, Craig, 2009, “Carry Trades and Currency Crashes: A Comment,” Macroeconomics Annual 2008.
Christiansen, Charlotte, Angelo Ranaldo, and Paul Söderllind, 2011, “The Time-Varying Systematic Risk of Carry Trade Strategies,” Journal of Financial and Quantitative Analysis 46, 1107–1125.
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Lustig, Hanno N., Nikolai L. Roussanov, and Adrien Verdelhan, 2009, “Predictable Currency Risk Premia,” manuscript, UCLA.
Verdelhan, Adrien, 2010, “A Habit-Based Explanation of the Exchange Rate Risk Premium,” Journal of Finance 65, 123-146.
Lustig, Adrien, 2007, “The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk,” American Economic Review 97, 89-117.
Burnside, Craig, Bing Han, David Hirshleifer, and Tracy Yue Wang, 2010, “Investor Overconfidence and the Forward Premium Puzzle,” NBER Working Paper No. 15866.
Jurek, Jakub W., 2009, “Crash Neutral Carry Trades,” manuscript, Princeton University.
Carr, Peter and Liuren Wu, 2007, “Stochastic Skew in Currency Options,” Journal of Financial Economics 86, pp. 213-247.
Etula, Erkko, Jan J. J. Groen, and Tobias Adrian, 2010, Financial Amplification of Foreign Exchange Risk Premia Federal Reserve Bank of New York, Staff Report no. 461.
Hansen, Lars Peter, and Robert J. Hodrick, 1983, “Risk Averse Speculation in the Forward Foreign Exchange Market: An Econometric Analysis of Linear Models,” in Jacob A. Frenkel, ed., Exchange Rates and International Macroeconomics. Chicago, IL: University of Chicago Press, 113142.
Hodrick, Robert J., and Sanjay Srivastava, 1984, “An Investigation of Risk and Return in Forward Foreign Exchange,” Journal of International Money and Finance 3, 529.
Hodrick, Robert J., 1987, The Empirical Evidence on the Efficiency of Forward and Futures Foreign Exchange Markets, Volume 24 in Fundamentals of Pure and Applied Economics, edited by Jacques Lesourne and Hugo Sonnenschein, Harwood Academic Publishers, 1987.
Bekaert, Geert and Robert J. Hodrick, Hodrick, 1992, “Characterizing Predictable Components in Excess Returns on Equity and Foreign Exchange Markets,” Journal of Finance 47, 467- 509.
Bekaert, Geert, 1995, “The Time-Variation of Expected Returns and Volatility in the Foreign Exchange Markets,” Journal of Business and Economic Statistics 13, pp. 397-408.
Engel, Charles, 1996, “The Forward Discount Anomaly and the Risk Premium: A Survey of Recent Evidence,” Journal of Empirical Finance 3, pp. 123-192.
Mark, Nelson C., 1988, “Time Varying Betas and Risk Premia in the Pricing of Forward Foreign Exchange Contracts,” Journal of Financial Economics 22, pp. 335-354.
Kaminsky, Graciela and Rodrigo Peruga, 1990, "Can a Time-Varying Risk Premium Explain Excess Returns in the Forward Market for Foreign Exchange," Journal of International Economics 28, 47-70.
Cumby, Robert E., 1988, “Is It Risk? Explaining Deviations from Uncovered Interest Parity,” Journal of Monetary Economics 22, pp. 279-299.
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Giovannini, Alberto and Philippe Jorion, 1989, “The Time-Variation of Risk and Return in the Foreign Exchange and Stock Markets,” Journal of Finance 44, pp. 307-326.
Wheatley, Simon, 1989, “A Critique of Latent Variable Tests of Asset Pricing Models,” Journal of Financial Economics 23, pp. 325-338.
Baillie, Richard and Tim Bollerslev, 1990, “A Multivariate Generalized ARCH Approach to Modeling Risk Premia in Forward Foreign Exchange Markets,” Journal of International Money and Finance 9, pp. 309-324.
Lewis, Karen K., 1991,”Should the Holding Period Matter for the Intertemporal CAPM?” Journal of Monetary Economics 28, pp. 365-389.
Campbell, John Y., Karine Serfaty-De Medeiros, and Luis M. Viceira, 2010, “Global Currency Hedging,” Journal of Finance 65, 87-121.
February 22 and 29, Classes 5 and 6: Theoretical Models of Currency Pricing
*Backus, David K., Federico Gavazzoni, Chris Telmer, and Stanley E. Zin, 2010, “Monetary Policy and the Uncovered Interest Rate Parity Puzzle” manuscript, NYU Stern School.
*Sarno, L., P. Schneider, and C. Wagner, 2012, “Properties of Foreign Exchange Risk Premia,” forthcoming Journal of Financial Economics.
*Bauer, Gregory H., and Antonio Diez de los Rios, 2012, “An International Dynamic Term Structure Model with Economic Restrictions and Unspanned Risks,” manuscript, Bank of Canada.
Bansal, Ravi, and Ivan Shaliastovich, 2010, “A Long-Run Risks Explanation of Predictability Puzzles in Bond and Currency Markets,” manuscript, Duke University.
Bacchetta, Philippe, and Eric van Wincoop, 2010, “Infrequent Portfolio Decisions: A Solution to the Forward Discount Puzzle,” American Economic Review 100, Number 3, 870-904.
Colacito, Riccardo, 2010, “Six Anomalies Looking for a Model: A Consumption Based Explanation of International Finance Puzzles,” manuscript, University of North Carolina.
Duffie, Darrell, 2010, “Presidential Address: Asset Price Dynamics with Slow-Moving Capital,” Journal of Finance 65, 1237-1268.
Dong, Sen, 2006, “Macro Variables, Term Structure of Interest Rates, and Exchange Rates,” Columbia Business School working paper.
Brennan, Michael and Yihong Xia, 2006, “International Capital Markets and Foreign Exchange Risk,” Review of Financial Studies 19, No. 3, pp. 753-795.
Brandt, Michael W., John H. Cochrane and Pedro Santa-Clara, 2006, “International Risk Sharing Is Better Than Think, Or Exchange Rates Are Much Too Smooth” Journal of Monetary Economics, pp. 671-698.
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Bakshi, Gurdip, Peter Carr, and Liuren Wu, 2008, “Stochastic Risk Premiums, Stochastic Skewness in Currency Options, and Stochastic Discount Factors in International Economies,” Journal of Financial Economic 87, 132-156.
Verdelhan, Adrien, 2010, “A Habit-Based Explanation of the Exchange Rate Risk Premium,” Journal of Finance 65, 123-45.
Colacito, Riccardo and Massimiliano Croce, 2010, “Risk for the Long Run and the Real Exchange Rate,” manuscript, University of North Carolina.
Colacito, Riccardo and Massimiliano Croce, 2010, “Risk Sharing for the Long Run: A General Equilibrium Approach to International Finance with Recursive Preferences and Long- Run Risks,” manuscript, University of North Carolina.
Backus, David, Silverio Foresi and Chris Telmer, 2001, “Affine Models of Currency Pricing” Journal of Finance 56, 279-304.
Bansal, Ravi, 1997, “An Exploration of the Forward Premium Puzzle in Currency Markets,” Review of Financial Studies 10, 369-403.
Brandt, Michael W. and Pedro Santa-Clara, 2002, “Simulated Likelihood Estimation of Diffusions with an Application to Exchange Rate Dynamics in Incomplete Markets” Journal of Financial Economics 63, 161-210.
Iwata, Shigeru and Shu Wu, 2005, “What International Risks Are (Not) Shared by International Investors,” Journal of Money, Credit and Banking 37, 6, 1121-1141
References and further reading may be available for this article. To view references and further reading you must purchase this article.
Andersen, Torben and Luca Benzoni, 2010, “Do Bonds Span Volatility Risk in the U.S. Treasury Market? A Specification Test for Affine Term Structure Models,” Journal of Finance 65, 603-653.
Dai, Qiang and Kenneth J. Singleton, 2000, “Specification Analysis of Affine Term Structure Models,” Journal of Finance 55, no. 5, 1943-78.
Dai, Qiang and Kenneth J. Singleton, 2002, “Expectation Puzzles, Time-Varying Risk Premia, and Affine Models of the Term Structure,” Journal of Financial Economics 63, 415-41.
Dai, Qiang and Kenneth J. Singleton, 2003, “Term Structure Dynamics in Theory and Reality” Review of Financial Studies 16, 631-78.
Bakshi, Gurdip and Zhiwu Chen, 1997, “Equilibrium Valuation of Foreign Exchange Claims” Journal of Finance 52, 799-826.
Saa-Requejo, Jesus, “The Dynamics of the Term Structure of Risk Premia in Foreign Exchange Markets,” manuscript, University of Chicago, 1995.
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Frachot, Antoine, “A Reexamination of the Uncovered Interest Rate Parity Hypothesis,” Journal of International Money and Finance 15, (June 1996), 419-437.
Ahn, Dong-Hyun, 2004, “Common Factors and Local Factors: Implications for Term Structures and Exhange Rates,” Journal of Financial and Quantitative Analysis 39, 1, 69-102.
Han, Bing and Peter Hammond, 2003, “Affine Models of the Joint Dynamics of Exchange Rates and Interest Rates,” Working Paper, University of Calgary.
March 7 and 14 – No Class, MBA Exams and Spring Break
March 21, Class 7: Empirical Models of Exchange Rates and Long-Horizon Predictability
B&H Chapter 10
* Gourinchas, Pierre-Olivier and Hélène Rey, 2007, “International Financial Adjustment,” Journal of Political Economy 115, pp. 665-703.
*Engel, Charles, and Kenneth D. West, 2005, “Exchange Rates and Fundamentals,” Journal of Political Economy 113, 485-517.
*Engel, Charles, Nelson C. Mark, and Kenneth D. West, 2007, “Exchange Rate Models Are Not as Bad as You Think,” NBER Macroeconomics Annual 2007, 381-441
*Rossi, Barbara, 2007, “Comment on Engel, Mark, and West,” NBER Macroeconomics Annual 2007, 453-470.
Engel, Charles, Jian Wang, and Jason Wu, 2010 “Long-Horizon Forecasts of Asset Prices when the Discount Factor is Close to Unity,” manuscript, University of Wisconsin.
Hodrick, Robert J., 1979, “On the Monetary Analysis of Exchange Rates A Comment,” in Karl Brunner and Allan H. Meltzer, eds., CarnegieRochester Conference Series on Public Policy, 11, supplement to the Journal of Monetary Economics, 103122.
Meese, Richard, and Kenneth Rogoff, 1983a. “Empirical Exchange Rate Models of the Seventies: Do They Fit Out of Sample? The Journal of International Economics 14, 3–24.
Meese, Richard, and Kenneth Rogoff, 1983b, “The Out of Sample Failure of Empirical Exchange Rate Models, in Exchange Rates and International Macroeconomics, ed. Jacob Frenkel, Chicago: University of Chicago Press, 67–103.
Bacchetta, Philippe, Eric van Wincoop, and Toni Beutler, 2009, “Can Parameter Instability Explain the Meese-Rogoff Puzzle,” International Seminar on Macroeconomics 2009, 125-173.
Cheung, Yin-Wong, Menzie Chinn, and Antonio Garcia Pascual. (2005) “Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive?” Journal of International Money and Financ, 24, 1150–75.
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Mussa, Michael, 1984, “The Theory of Exchange Rate Determination,” in J.F.O. Bilson and R.C. Marston, eds., Exchange Rate Theory and Practice, Chicago, IL: The University of Chicago Press.
Branson, William H., and Dale W. Henderson, 1984, “The Specification and Influence of Asset Markets,” Chapter 15 in Peter Kenen and Ron Jones, eds., Handbook of International Economics: Volume 2, North-Holland, Amsterdam.
Chari, V.V., Patrick J. Kehoe, and Ellen R. McGrattan, 2002, “Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates,” The Review of Economic Studies 69, 533- 563.
Alvarez, Fernando, Andrew Atkeson, and Patrick J. Kehoe, 2009, “Time-Varying Risk, Interest Rates, and Exchange Rates in General Equilibrium,” Review of Economic Studies 76, 851-878.
Devereux, Michael B. and Charles Engel, 2006, “Expectations and Exchange Rate Policy,” NBER Working Paper No. 12213.
Engel, Charles and Akito Matsumoto, 2006, “Portfolio Choice in a Monetary Open-Economy DSGE Model,” NBER Working Paper No. 12214.
Della Corte, Pasquale, Lucio Sarno and Ilias Tsiakas, 2009, “An Economic Evaluation of Empirical Exchange Rate Models,” Review of Financial Studies 22, 3491-3530.
West, K. D., H. J. Edison, and D. Cho. 1993. “A Utility-Based Comparison of Some Models of Exchange Rate Volatility,” Journal of International Economics 35:23–45.
Lyons, Richard K., 2001, The Microstructure Approach to Exchange Rates. MIT Press: Cambridge, MA.
Hodrick, Robert J., 1992, "Dividend Yields and Expected Stock Returns: Alternative Procedures for Inference and Measurement," Review of Financial Studies 5, 357-386.
Ang, Andrew and Geert Bekaert, 2007, “Stock Return Predictability: Is It There?” Review of Financial Studies 20, 651-707.
Cochrane, John H., 2008, “The Dog That Did Not Bark: A Defense of Return Predictability,” Review of Financial Studies 21, 1533-1575.
Boudoukh, Jacob, Roni Michaely, Matthew Richardson, and Michael R. Roberts, 2007, "On the Importance of Measuring Payout Yield: Implications for Empirical Asset Pricing," Journal of Finance 62, 877-915.
Boudoukh, Jacob, Matthew Richardson and Robert Whitelaw, 2006, “The Myth of Long-Horizon Predictability,” Review of Financial Studies 21, 1577-1605.
March 28, Class 8: Equity Risk Premiums and the International Cost of Capital
B&H Chapters 11-13
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* Fama, Eugene and Kenneth French, 2011, “Size, Value, and Momentum in International Stock Returns,” Manuscript, Booth School of Business, University of Chicago.
*Moskowitz, Tobias, Yao Hua Ooi, and Lasse H. Pedersen, 2012, “Time Series Momentum,” forthcoming Journal of Financial Economics.
*Asness, Clifford, Tobias Moskowitz, and Lasse H. Pedersen, 2009, “Value and Momentum Everywhere,” NBER Working Paper No.
*Lewis, Karen K., 2011, “Global Asset Pricing,” Annual Review of Financial Economics 3, 435- 66.
Hodrick, Robert J., David Ng and Paul Sengmueller, 1999, “An International Dynamic Asset Pricing Model,” International Tax and Public Finance 6, November, 597-620.
Hodrick, Robert J. and Xiaoyan Zhang, 2001, “Evaluating the Specification Errors of Asset Pricing Models,” Journal of Financial Economics 62, 327-376.
Zhang, Xiaoyan, 2005, “Specification Tests of International Asset Pricing Models,” Journal of International Money and Finance 25, pp. 275-307.
Lee, Charles, David Ng and Bhaskaran Swaminathan, 2009, “Testing International Asset Pricing Models Using Implied Costs of Capital,” Journal of Financial and Quantitative Analysis 44, 307-335.
Pastor, Lubos, Meenakshi Sinha, and Bhaskaran Swaminathan, 2008, “Estimating the Intertemporal Risk–Return Tradeoff Using the Implied Cost of Capital” Journal of Finance 63, 2859-2897.
Fama, Eugene and Kenneth French, “Value versus Growth: The International Evidence,” Journal of Finance 53, December 1998, 1975-1999.
Karolyi, G. Andrew and René M. Stulz, 2003, “Are Financial Assets Priced Locally or Globally?” Chapter 16 in George Constantinides, Milton Harris and René Stulz, eds., Handbook of the Economics of Finance, Elsevier: Amsterdam.
Griffin, John M., Xiuqing Ji and J. Spencer Martin, 2003, “Momentum Investing and Business Cycle Risk: Evidence from Pole to Pole,” Journal of Finance 58, 2515-2547.
Claus, James and Jacob Thomas, 2001, “Equity Premia as Low as Three Percent? Evidence from Analysts’ Earnings Forecasts for Domestic and International Stock Markets,” Journal of Finance 56, 1629 – 1666.
Stulz, René M., “International Portfolio Choice and Asset Pricing: An Integrative Survey,” in Handbooks of Operations Research and Management Science, Vol. 9, Finance, edited by R. Jarrow, V. Maksimovic and W. Ziemba, 1995.
Stulz, René M., "A Model of International Asset Pricing," Journal of Financial Economics 9, (1981): 383-406.
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Adler, Michael and Bernard Dumas, “International Portfolio Choice and Corporation Finance: A Synthesis” Journal of Finance 38, (1983), 925-984.
Vassalou, Maria, "Exchange Rate and Foreign Inflation Risk Premiums in Global Equity Returns," Journal of International Money and Finance, 2000, 19, 433470.
Harvey, Campbell, 1991, "The World Price of Covariance Risk," Journal of Finance 46, 111- 158.
Ferson, Wayne and Campbell Harvey, 1993, “The Risk and Predictability of International Equity Returns,” Review of Financial Studies 6, 527-567.
Dumas, Bernard and Bruno Solnik, 1995, “The World Price of Foreign Exchange Risk,” Journal of Finance 50, 445-479.
De Santis, Georgio and Bruno Gerard, 1997, “International Asset Pricing and Portfolio Diversification with Time-Varying Risk,” Journal of Finance 52, 1881-1912.
De Santis, Georgio and Bruno Gerard, 1998, “How Big is the Premium for Currency Risk?” Journal of Financial Economics 49, 375-412.
Chan, K.C., G. Andrew Karolyi and René Stulz, 1992, "Global Financial Markets and the Risk Premium on U.S. Equity," Journal of Financial Economics 32, 137-168.
Dumas, Bernard, Campbell R. Harvey and Pierre Ruiz, 2003, “Are Correlations of Stock Returns Justified by Subsequent Changes in National Outputs?” Journal of International Money and Finance 22, 777-812.
Kasa, Kenneth, “Consumption-based versus Production-based Models of International Equity Markets,” Journal of International Money and Finance 16, October 1997, 653-680.
Lin, Weng-Lin, Robert F. Engle and Takatoshi Ito, “Do Bulls and Bears Move Across Borders?” Review of Financial Studies 7, 507-538.
Cumby, Robert E. "Consumption Risk and International Equity Returns: Some Empirical Evidence," Journal of International Money and Finance 9, June 1990, 182-192.
Korajczyk, Robert A. and Claude J. Viallet, "An Empirical Investigation of International Asset Pricing" The Review of Financial Studies, 2, 553-586.
Korajczyk, Robert A. and Claude J. Viallet, "Equity Risk Premia and the Pricing of Foreign Exchange Risk," Journal of International Economics, 1992.
Solnik, Bruno, 1993, "The Performance of International Strategies Using Conditioning Information," Journal of Empirical Finance 1, 33-55.
Cumby, Robert E. and Jack D. Glen, "Evaluating the Performance of International Mutual Funds," Journal of Finance 45, June 1990, 497-522.
Doidge, Craig G., Andrew Karolyi, and René M. Stulz, 2010, “Why Do Firms Leave U.S. Equity Markets,” Journal of Finance 65, 1507-1554.
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Froot, Kenneth A. and Jeremy C. Stein, 1991, “Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach, “Quarterly Journal of Economics 106, 1191- 1217.
April 4, Class 9: International Diversification and Home Bias
*Bekaert, Geert, Robert Hodrick, and Xiaoyan Zhang, 2009, “International Stock Return Comovements,” Journal of Finance 64, 2591-2626.
*Heston, Steve and Geert Rouwenhorst, 1994, “Does Industrial Structure Explain the Benefits of International Diversification,” Journal of Financial Economics 36, 3-27.
*Guidolin, Massimo and Allan Timmermann, 2008, “International Asset Allocation under Regime Switching, Skew, and Kurtosis Preferences,” Review of Financial Studies 21, 889-935.
Bekaert, Geert, and Xiaozheng Wang, 2009, “Home Bias Revisited,” manuscript Columbia Business School.
Quinn, Dennis, and Hans-Joachim Voth, 2009, “Free Flows, Limited Diversification: Openness and the Fall and Rise of Stock Market Correlations, 1890-2001,” International Seminar on Macroeconomics 2009, 7-39.
Lau, Sie Ting, Lilian Ng, and Bohui Zhang, 2010, “The World Price of Home Bias,” Journal of Financial Economics 97, 191-217.
Hau, Harald, Massimo Massa, and Joel Peress, 2010, “Do Demand Curves for Currencies Slope Down? Evidence from the MSCI Global Index Change,” Review of Financial Studies 23, 1681-1717.
Brealey, Richard A., Ian A. Cooper, and Evi Kaplanis, 2010, “Excess Comovement in International Equity Markets: Evidence from Cross-border Mergers,” Review of Financial Studies 23, 1718-1740.
Gagnon, Louis, and Andrew Karolyi, 2010, “Multi-market Trading and Arbitrage,” Journal of Financial Economics 97, 53-80.
Griffin, John and G. Karolyi, 1998, “Another Look at the Role of the Industrial Structure of Markets for International Diversification Strategies,” Journal of Financial Economics 50, 351-373.
Gagnon, Louis and G. Andrew Karolyi, 2009, “Information, Trading Volume, and International Stock Return Comovements: Evidence from Cross-Listed Stocks,” Journal of Financial and Quantitative Analysis 44, 953-986.
Bartram, Söhnke M., John Griffin, and David Ng, 2010, “How Important Are Foreign Ownership Linkages for International Stock Returns,” manuscript Cornell University.
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Engel, Charles, and Akito Matsumoto, 2009, “The International Diversification Puzzle When Goods Prices Are Sticky: It’s Really about Exchange-Rate Hedging, Not Equity Portfolios,” American Economic Journal: Macroeconomics 1, 155-188.
Ang, Andrew and Geert Bekaert, 2002, "International Asset Allocation with Regime Shifts,” Review of Financial Studies 15, 1137-1187.
Solnik, Bruno, and François Longin, 2001, “Extreme Correlation of International Equity Markets” Journal of Finance 56, 649-656.
Lewis, Karen, 1999, “Trying to Explain Home Bias in Equities and Consumption,” Journal of Economic Literature 37, 571-608.
Lewis, Karen, 2006, “Is the International Diversification Potential Diminishing? Foreign Equity Inside and Outside the US,” NBER Working Paper No. 12697.
Kang, Jun-Koo and René Stulz, 1997, “Why Is There Home Bias? An Analysis of Foreign Equity Ownership in Japan,” Journal of Financial Economics 46, 3-28.
Brennan, Michael J. and H. H. Cao, 1997, “International Portfolio Investment Flows,” Journal of Finance 52, 1851-1880.
Coeurdacier, Nicolas, and Pierre-Olivier Gourinchas, 2008, “When Bonds Matter: Home Bias in Goods and Assets” manuscript, London Business School
Uppal, Raman and Tan Wang, 2003, “Model Misspecification and Under-diversification,” Journal of Finance 58, 2465-2486.
Colacito, Riccardo and Max Croce, 2010, “The Short- and Long-Run Benefits of Financial Integration,” American Economic Review, 100, 527-31.
April 11, Class 10: Emerging Markets
B&H Chapter 14
*Bekaert, Geert, Campbell R. Harvey and Chris Lundblad, 2011, “Financial Openness and Productivity,” World Development 39, 1-19.
*Bekaert, Geert, Campbell R. Harvey and Chris Lundblad, 2007, “Liquidity and Expected Returns: Lessons from Emerging Markets,” Review of Financial Studies 20, pp. 1783- 1832.
*Bekaert, Geert, Campbell R. Harvey, Chris Lundblad, and Stephan Siegel, 2012, “What Segments Equity Markets?” forthcoming Review of Financial Studies.
Bekaert, Geert, Campbell R. Harvey, Chris Lundblad, and Stephan Siegel, 2007, “Global Growth Opportunities and Market Integration,” Journal of Finance 62, 1081-1138
Bekaert, Geert, Campbell R. Harvey and Chris Lundblad, 2006, "Growth Volatility and Equity Market Liberalization," Journal of International Money and Finance 25, 379-403.
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Bekaert, Geert and Campbell R. Harvey, 2003, "Emerging Markets Finance," Special Issue of the Journal of Empirical Finance 10, 1-217.
Bekaert, Geert and Campbell R. Harvey, 1995, “Time-varying World Market Integration,” Journal of Finance 50, 403-444.
Bekaert, Geert and Campbell R. Harvey, 1997, “Emerging Equity Market Volatility,” Journal of Financial Economics 43, 29-77
Bekaert, Geert and Michael S. Urias, 1996, “Diversification, Integration and Emerging Market Closed-End Funds,” Journal of Finance 51, 835-869.
Errunza, Vihang, and Etienne Losq, 1985, “International Asset Pricing Under Mild Segmentation: Theory and Tests”, Journal of Finance 40, 105-124.
Chaieb, Ines and Vihang Errunza, 2007, “International Asset Pricing under Segmentation and PPP Deviations,” Journal of Financial Economics 86, pp. 543-578.
Stulz, René and Walter Wasserfallen, 1995, “Foreign Equity Investment Restrictions and Shareholder Wealth Maximization,” Review of Financial Studies 6, 1019-1057.
Alfaro, Laura, Sebnem Kalemli-Ozcan and Vadym Volosovych, 2008, “Why Doesn’t Capital Flow from Rich Countries to Poor Countries? An Empirical Investigation,” Review of Economics and Statistics 90, 347-368.
Li, Kai, Asani Sarkar and Zhenyu Wang, 2003, “Diversification Benefits of Emerging Markets Subject to Portfolio Constraints,” Journal of Empirical Finance 10, 57-80.
Kumar, M., U. Moorthy and W. Perraudin, 2003, “Predicting Emerging Market Currency Crashes,” Journal of Empirical Finance 10, 427-454.
Henry, Peter Blair, 2000, “Stock Market Liberalization, Economic Reform, and Emerging Market Equity Prices,” Journal of Finance 55, 529-564.
Henry, Peter Blair, 2000, “Do Stock Market Liberalizations cause Investment Booms?” Journal of Financial Economics 58, 301-334.
Forbes, Kristin, 2005, “The Microeconomic Evidence on Capital Controls: No Free Lunch,” in Sebastian Edwards, ed., International Capital Flows, NBER.
April 18, Class 11: Models of Sovereign Risk
*Acharya, Viral, and Raghuram G. Rajan, 2011, “Sovereign debt, government myopia, and the financial sector,” NBER Working Paper No. 17542.
*Longstaff, Francis, Jun Pan, Lasse Pedersen, and Kenneth Singleton, 2011, “How Sovereign Is Sovereign Credit Risk,” American Economic Journal: Macroeconomics 3, 75-103.
*Hilsher, Jens, and Yves Nosbusch, 2010, “Determinants of Sovereign Risk: Macroeconomic Fundamentals and the Pricing of Sovereign Debt,” Review of Finance 14, 235-262.
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*Panizza, Ugo, Federico Sturzenegger, and Jeromin Zettelmeyer, 2009, “The Economics and Law of Sovereign Debt and Default,” Journal of Economic Literature 47, 651-698.
*Acharya, Viral, and Raghuram G. Rajan, 2011, “Sovereign debt, government myopia, and the financial sector,” NBER Working Paper No. 17542
Eaton, Jonathan, and Mark Gersovitz, 1981, “Debt with Potential Repudiation: Theory and Estimation,” Review of Economic Studies 48, 289-309.
Bulow, Jeremy, and Kenneth Rogoff, 1989, “A Constant Recontracting Model of Sovereign Debt,” Journal of Political Economy 97, 155-178.
Duffie, Darrell, Lasse Pedersen and Kenneth Singleton, 2003, “Modeling Credit Spreads on Sovereign Debt: A Case Study of Russian Bonds,” Journal of Finance 55, 119-159.
Pan, Jun and Kenneth Singleton, 2008, “Default and Recovery Implicit in the Term Structure of Sovereign CDS Spreads,” Journal of Finance 63, 2345-2384.
Oliveira, Rogerio, Ludan Liu and Piero Ghezzi, 2005, “On the Pricing of EM Currency-Linked Offshore Notes,” Deutsche Bank Research Document.
Kitchen, John, and Menzie D. Chinn, 2010, “ Financing U.S. Debt: Is There Enough Money in the World – and At What Cost?” Manuscript, University of Wisconsin.
Bohn, Henning, 1995, “The Sustainability of Budget Deficits in a Stochastic Economy”, Journal of Money, Credit & Banking 27.
Bohn, Henning, 2010, “The Economic Consequences of Rising U.S. Government Debt: Privileges at Risk,” manuscript, University of California, Santa Barbara.
Uribe, Martín, 2006, “A Fiscal Theory of Sovereign Risk” Journal of Monetary Economics 53, 1857-1875
Borensztein, Eduardo, and Ugo Panizza, 2008, “The Costs of Sovereign Default,” IMF Working Paper No. 08/238.
April 25, Class 12: Other CAPMs
Acharya, Viral and Lasse H. Pedersen, 2005, “Asset Pricing with Liquidity Risk,” Journal of Financial Economics 77, 375-410.
Brunnermeier, Markus, and Lasse H. Pedersen, 2009, “Market Liquidity and Funding Liquidity,” The Review of Financial Studies 22, 2201-2238.
Pedersen, Lasse H., 2009, “When Everyone Runs for the Exit,” International Journal of Central Banking 5, 177-199.
Garleanu, Nicolae and Lasse H. Pedersen, 2011, “Margin-Based Asset Pricing and Deviations from the Law of One Price,” The Review of Financial Studies 24, 1980-2022.
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Ashcraft, Adam, Nicolae Garleanu, and Lasse H. Pedersen, 2011, “Two Monetary Tools: Interest Rates and Haircuts,” NBER Macroeconomics Annual, 25, 143-180.
International Aspects of Financial Crises
*Gourinchas, Pierre-Olivier and Maurice Obstfeld, 2011, “Stories of the Twentieth Century for the Twenty-First," American Economic Journal: Macroeconomics 4, 226–265.
Reinhart, Carmen M., and Kenneth S. Rogoff, 2009, This Time Is Different: Eight Centuries of Financial Folly. Princeton, NJ: Princeton University Press.
Allen, Franklin, Ana Babus and Elena Carletti 2009, “Financial Crises: Theory and Evidence,” Annual Reviews of Financial Economics 1, 97-116.
Gray, Dale, 2009, “Modeling Financial Crises and Sovereign Risks,” Annual Reviews of Financial Economics 1, 117-144.
Obstfeld , Maurice , and Kenneth Rogoff, 2010,“Global Imbalances and the Financial Crisis: Products of Common Causes” in Asia Economic Policy Conference Volume, Federal Reserve Bank of San Francisco.
Lim, Dominic, Robert B. Durand, and Joey Wenling Yang, 2010. “The Microstructure of Fear, the Fama-French Factors and the Global Financial Crisis of 2007 and 2008,” manuscript University of Western Australia.
Daniel, Betty C., 2010, “Exchange Rate Crises and Fiscal Solvency,” Journal of Money, Credit, and Banking 42, 1109-1136.
Growth and Current Account Imbalances
Caballero, Ricardo J., Emmanuel Farhi, and Pierre-Olivier Gourinchas, 2008, “An Equilibrium Model of ‘Global Imbalances’ and Low Interest Rates” American Economic Review 98, 358-393.
Gourinchas, Pierre-Olivier and Hélène Rey, 2007, “From World Banker to World Venture Capitalist: US External Adjustment and the Exorbitant Privilege,” in R. Clarida ed. G7 Current Account Imbalances: Sustainability and Adjustment, University of Chicago Press.
Gourinchas, Pierre-Olivier and Olivier Jeanne, 2006, “The Elusive Gains from International Financial Integration," Review of Economic Studies 73, 715-741.
McGrattan, Ellen R., and Edward C. Prescott, 2009, “Openness, Technological Capital, and Development,” Journal of Economic Theory 144, 2454-2476.
Fratzscher, Marcel, Luciana Juvenal, and Lucio Sarno, 2010, “Asset Prices, Exchange Rates and the Current Account” European Economic Journal 54, 643-658.
Hausmann, Ricardo, and Federico Sturenegger, 2007, “The Missing Dark Matter in the Wealth of Nations and Its Implications for Global Imbalances,” Economic Policy 51, 469-518.
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Clarida, Richard H., 2007, G7 Current Account Imbalances: Sustainability and Adjustment, NBER, University of Chicago Press.
Dooley, Michael, David Folkerts-Landau, and Peter Garber, 2006, International Financial Stability: Asia, Interest Rates, and the Dollar Deutsche Bank Research Department.
Lane, Philip and Gian Maria Milesi-Ferretti, 2007, “The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970-2004,” Journal of International Economics 73, 223-250.
Engel, Charles and John H. Rogers, 2006, “The U.S. Current Account Deficit and the Expected Share of World Output,” Journal of Monetary Economics 53, 106301093.
Edwards, Sebastian, 2006, “The U.S. Current Account Deficit: Gradual Correction or Abrupt Adjustment?”Journal of Policy Modeling 28, 649-683.
Gruber, Joseph W. and Steven B. Kamin, 2007, “Explaining the Global Pattern of Current Account Imbalances,” Journal of International Money and Finance 26,500-522.
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