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Index
Cover
Series Page
Title Page
Copyright
Dedication Page
Preface
Contributors
Part I: Overview
Chapter 1: Foreign Exchange Market Structure, Players, and Evolution
1.1 Introduction
1.2 Geography and Composition of Currency Trading
1.3 Players and Information in FX Market
1.4 Electronic Trading Revolution in FX Market
1.5 Survey of Multibank FX Platforms
1.6 Summary
1.7 Glossary
1.8 Acknowledgments
References
Chapter 2: Macro Approaches to Foreign Exchange Determination
2.1 Introduction
2.2 Models of the Nominal Exchange Rate
2.3 Real Models of the Real Exchange Rate
2.4 New Directions in Exchange-Rate Modeling
2.5 Conclusions
2.6 Acknowledgments
References
Chapter 3: Micro Approaches to Foreign Exchange Determination
3.1 Introduction
3.2 Perspectives on Spot-Rate Dynamics
3.3 Currency Trading Models and their Implications
3.4 Exchange Rates, Order Flows, and the Macro Economy
3.5 Conclusion
3.6 Appendix
3.7 Acknowledgment
References
Chapter 4: The Exchange Rate in a Behavioral Finance Framework
4.1 Introduction
4.2 Exchange Rate Puzzles
4.3 A Prototype Behavioral Model of the Foreign Exchange Market
4.4 Conclusion
References
Chapter 5: The Evolution of Exchange Rate Regimes and Some Future Perspectives
5.1 Introduction
5.2 A Brief History of Currency Regimes
5.3 Performance of the Laisser-Faire Exchange Rate System, 1973–2010
5.4 Trends in Currency Use
5.5 Prospects for the Future
5.6 Concluding Comments
5.7 Appendix A: A Formal Test of Hollowing Out
References
Part II: Exchange Rate Models and Methods
Chapter 6: Purchasing Power Parity in Economic History
6.1 Introduction
6.2 Categorization of Purchasing-Power-Parity Theories
6.3 Historical Application of PPP: Premodern Periods
6.4 Techniques of Testing PPP Theory in Economic-History Literature
6.5 Price Variable in PPP Computations
6.6 Modern Period: Testing of PPP
6.7 Analysis of U.S. Return to Gold Standard in 1879
6.8 Establishment and Assessment of a Fixed Exchange Rate in Interwar Period
6.9 Conclusions
References
Chapter 7: Purchasing Power Parity in Tradable Goods
7.1 Introduction
7.2 The LOP and Price Indices
7.3 Empirical Evidence on the LOP
7.4 Purchasing Power Parity
7.5 Aggregating from the LOP to PPP: What Can We Infer?
7.6 Conclusion and Implications
7.7 Appendix: TAR modeling
7.8 Acknowledgments
References
Chapter 8: Statistical and Economic Methods for Evaluating Exchange Rate Predictability
8.1 Introduction
8.2 Models for Exchange Rate Predictability
8.3 Statistical Evaluation of Exchange Rate Predictability
8.4 Economic Evaluation of Exchange Rate Predictability
8.5 Combined Forecasts
8.6 Empirical Results
8.7 Conclusion
8.8 Appendix A: The Bootstrap Algorithm
8.9 Acknowledgments
References
Chapter 9: When Are Pooled Panel-Data Regression Forecasts of Exchange Rates More Accurate than the Time-Series Regression Forecasts?
9.1 Introduction
9.2 Panel Data Exchange Rate Determination Studies
9.3 Asymptotic Consequences of Pooling
9.4 Monte Carlo Study
9.5 An Illustration with Data
9.6 Conclusions
References
Chapter 10: Carry Trades and Risk
10.1 Introduction
10.2 The Carry Trade: Basic Facts
10.3 Pricing the Returns to the Carry Trade
10.4 Empirical Findings
10.5 Time-Varying Risk and Rare Events
10.6 Conclusion
10.7 Acknowledgments
References
Chapter 11: Currency Fair Value Models
11.1 Introduction
11.2 Models/Taxonomy
11.3 Implementation Choices and Model Characteristics
11.4 Conclusion
11.5 Acknowledgments
References
Chapter 12: Technical Analysis in the Foreign Exchange Market
12.1 Introduction
12.2 The Practice of Technical Analysis
12.3 Studies of Technical Analysis in the Foreign Exchange Market
12.4 Explaining The Success of Technical Analysis
12.5 The Future of Research on Technical Analysis
12.6 Conclusion
12.7 Acknowledgments
References
Chapter 13: Modeling Exchange Rates with Incomplete Information
13.1 Introduction
13.2 Basic Monetary Model
13.3 Information Heterogeneity
13.4 Model Uncertainty
13.5 Infrequent Decision Making
13.6 Conclusion
13.7 Acknowledgments
References
Chapter 14: Exchange Rates in a Stochastic Discount Factor Framework
14.1 Introduction
14.2 Exchange Rates and Stochastic Discount Factors
14.3 Empirical Evidence
14.4 Models
14.5 Conclusion
References
Chapter 15: Volatility and Correlation Timing in Active Currency Management
15.1 Introduction
15.2 Dynamic Models for Volatility and Correlation
15.3 The Economic Value of Volatility and Correlation Timing
15.4 Parameter Uncertainty in Bayesian Asset Allocation
15.5 Model Uncertainty
15.6 Empirical Results
15.7 Conclusion
15.8 Appendix A: Univariate Models for Volatility Timing
15.9 Appendix B: Parameter Uncertainty and the Predictive Density
15.10 Acknowledgments
References
Part III: FX Markets and Products
Chapter 16: Active Currency Management Part I: Is There a Premium for Currency Investing (Beta)
16.1 Introduction
16.2 Beta in the Foreign Exchange Markets
16.3 Multiple Forms of FX Beta
16.4 Carry FX Indices from Banks
16.5 Trend-Following FX Indices from Banks
16.6 Conclusion
References
Chapter 17: Active Currency Management Part II: Is There Skill or Alpha in Currency Investing?
17.1 Introduction
17.2 Alternative Currency Management Mandates
17.3 Benchmarks for Currency Fund Management
17.4 Empirical Evidence with the Barclay Currency Traders Index and Individual Fund Managers
17.5 Empirical Evidence: Fund Managers on the DB FX Select Platform
17.6 Conclusions and Investment Implications
References
Chapter 18: Currency Hedging for International Bond and Equity Investors
18.1 Introduction
18.2 Overview of Empirical Hedging Studies
18.3 Return and Volatility Impact of Currency Hedging
18.4 Hedge Instruments—Currency Forwards versus Options
18.5 Managing Tracking Error in Forward Hedges
18.6 Conclusions
References
Chapter 19: FX Reserve Management
19.1 FX Reserve Management
19.2 FX Reserve Uses
19.3 FX Reserve Sources
19.4 Objectives of Reserves Management
19.5 Techniques of Reserve Management
19.6 Historical Perspective
19.7 What Assets Do Central Banks Hold?
19.8 Constraints
19.9 External Managers
19.10 Costs of Accumulation and Holding of Reserves
19.11 Diversification
19.12 Challenges to Diversification and Size of Reserves
19.13 Changing Role of the Dollar as the International Reserve Currency
19.14 Reserve Management if the Dollar is Replaced as the Reserve Currency
19.15 Conclusion
19.16 Acknowledgments
References
Chapter 20: High Frequency Finance: Using Scaling Laws to Build Trading Models
20.1 Introduction
20.2 The Intrinsic Time Framework
20.3 Scaling Laws
20.4 The Scale of Market Quakes
20.5 Trading Models
20.6 Conclusion
20.7 Acknowledgments
References
Chapter 21: Algorithmic Execution in Foreign Exchange
21.1 Introduction
21.2 Key Components of an Algorithmic Execution Framework
21.3 Types of Algorithms
21.4 What Execution Strategies are Most Effective?
21.5 Looking Forward
21.6 Appendix A
References
Chapter 22: Foreign Exchange Strategy Based Products
22.1 Introduction
22.2 Evolution of the Foreign Exchange Market
22.3 Foreign Exchange Investable Indices and Strategy-Based Products
22.4 Conclusion
References
Chapter 23: Foreign Exchange Futures, Forwards, and Swaps
23.1 Introduction
23.2 Market Basics and Size
23.3 Dislocations of the FX and Cross-Currency Swap Markets under Financial Crises
23.4 Conclusion
23.5 Acknowledgments
References
Chapter 24: FX Options and Volatility Derivatives: An Overview from the Buy-Side Perspective
24.1 Introduction
24.2 Why Would One Bother With an Option?
24.3 Market for FX Options
24.4 Volatility
24.5 FX Options from the Buy-Side Perspective
24.6 Acknowledgment
References
Part IV: FX Markets and Policy
Chapter 25: A Common Framework for Thinking about Currency Crises
25.1 Introduction
25.2 The KFG Model
25.3 Extensions
25.4 Empirical Work
25.5 Conclusion
References
Chapter 26: Official Intervention in the Foreign Exchange Market
26.1 Introduction
26.2 Official FX Interventions and Reserve Accumulation: Stylized Facts, Motives, and Effects
26.3 Empirical Evidence on the Effectiveness of Official FX Interventions
26.4 Conclusions
26.5 Acknowledgements
References
Chapter 27: Exchange Rate Misalignment—The Case of the Chinese Renminbi
27.1 Introduction
27.2 Background
27.3 Undervalued or Overvalued
27.4 Concluding Remarks
27.5 Acknowledgments
References
Chapter 28: Choosing an Exchange Rate Regime
28.1 Five Advantages of Fixed Exchange Rates
28.2 Econometric Evidence on the Bilateral Trade Effects of Currency Regimes
28.3 Five Advantages of Floating Exchange Rates
28.4 How to Weigh Up the Advantages of Fixing Versus Floating
28.5 Country Characteristics That Should Help Determine the Choice of Regime
28.6 Alternative Nominal Anchors
References
Index
Wiley Series
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