There is no textbook for this course. The lecture notes and the notes
you make in class will be your main resource. I also provide specific
references for each topic that I expect you to read. These are the main
source of support for the course
However, we will be covering several topics which are addressed by
Handbook of Exchange Rates (2012) edited by Jessica James, Ian
Marsh and Lucio Sarno, Wiley
I will be placing copies of the working papers of most of these chapters
on Moodle, however, so there is no need to buy this book unless:
You are very rich (Amazon sells it for £95, £65 on Kindle)
You want to increase my income (I get about $1 per copy so buy
You want to stand on it to appear taller (It is over 800 pages
In the past, I have recommended the following texts as useful
supplements. Again, there is no need to buy any of them but they are
a useful resource in addition to the lecture notes and the papers we
will be discussing.
Mark, Nelson C. (2001) International Macroeconomics & Finance,
Sarno, Lucio, and Mark Taylor (2002) The Economics of Exchange
Rates, Cambridge University Press
Hallwood, C. Paul and Ronald MacDonald (2000) International
Money & Finance 3/e Blackwell
Ronald MacDonald (2007) Exchange Rate Economics, Routledge
Levich, Richard M. (2001) International Financial Markets 2/e,
Michael Rosenberg (2003) Exchange Rate Determination,
Momtchil Pojarliev and Richard Levich (2012) A New Look at
Currency Investing, CFA Institute
Mark's book is short, technical and aimed at students familiar with
economics and econometrics.
Sarno and Taylor is a set of very detailed literature reviews, which
assume good economics knowledge.
Hallwood and MacDonald is longer, slightly more basic and aimed at
MacDonald is squarely aimed at economics graduates.
Levich is much less technical, and is partial in its coverage but is
popular with management and MBA students.
Rosenberg is an MBA/practitioner text. This is closest aligned to the
topics we cover but is too superficial and must be supplemented with
in depth readings.
Pojarliev and Levich is a free downloadable book from the CFA Institute.
It is very strong on investor performance but mentions some of the
other topics addressed. It is a god supplemental read.
Where possible I have linked the readings to websites where the
papers can be downloaded (CTRL and click over the hyperlink). There
are also references embedded in the lecture notes.
Hallwood and MacDonald, chapters 2 and 3.
Levich, chapter 2.
MacKinnon, Ronald (1993) "The rules of the game: international
money in historical perspective", Journal of Economic Literature,
Reinhart, Carmen and Kenneth Rogoff (2002) "The modern
history of exchange rate arrangements: a reinterpretation" NBER
WP8963. NB - this paper is over 100 pages long so do not print it
all out! It is a useful reference document from which we will take
Michael King, Carol Osler and Dagfinn Rime (2011) “Foreign
exchange market structure, players and evolution” working
Topic 1. Parity Conditions and Trading strategies
I list here the textbook chapters that are relevant and some key
readings on the topics. If you want a basic understanding of the topic
then the lecture notes plus a look at a textbook should be enough.
To get a good grade in the exam question I think you need to read the
suggested papers but if you are looking for distinction level marks then
you need to do more - this might mean read further academic papers
(eg those referenced in the texts and/or papers) or to consider the
practical or policy implications of the topic.
Mark, chapters 2 and 3.
Sarno and Taylor, chapter 2.
Hallwood and MacDonald, chapters 3 and 7.
MacDonald, chapter 1.
Levich, chapters 4 and 5.
Rosenberg, chapter 5.
Chinn, Menzie and Guy Meredith (2003) "Monetary policy and
long-horizon uncovered interest rate parity" mimeo.
Taylor, Mark (1987) "Covered interest parity: a high-frequency,
high-quality data study", Economica, 54, 429-438.
Taylor, Mark (1989) "Covered interest arbitrage and market
turbulence", Economic Journal, 99, 376-391.
Farooq Akram, Dagfinn Rime and Lucio Sarno (2006) “Arbitrage in
the Foreign Exchange Market: Turning on the Microscope”, SSRN
paper no. 887442 also at http://www.norgesbank.no/upload/import/publikasjoner/arbeidsnotater/pdf/arb2005-12.pdf
Kenneth Froot and Richard Thaler (1990) “Foreign Exchange”
Journal of Economic Perspectives, 4(3), pages 179-92
Menzie D. Chinn and Guy Meredith (2005) “Testing Uncovered
Interest Parity at Short and Long Horizons”, at
Richard Levich and Michael Thomas (1993) “The Significance of
Technical Trading Rule Profits in the Foreign Exchange Markets”
Journal of International Money and Finance, 12, 451-474
Craig Burnside (2011) “Carry Trades and Risk” NBER working
paper No. 17278
Topic 2. Macroeconomic Models of Exchange Rate Determination
What is a euro worth? Is the dollar undervalued? Is the Chinese yuan
overvalued? To answer these questions we need a good model of fair
value for the exchange rate. In this section of the course we consider
the various contenders for the job. We will discuss their theoretical
strengths and weaknesses and assess their empirical performance.
Mark, chapters 3 and 8.2
Sarno and Taylor, chapters 3 and 4.
Hallwood and MacDonald, chapters 8 and 13.
MacDonald, chapters 2-7.
Rosenberg, chapters 2 and 9 (plus 3, 4, 6 and 8 are worth
Kilian, Lutz and Mark P. Taylor (2001) "Why is it so difficult to beat
the random walk forecast of exchange rates?" ECB working paper
Meese, Richard and Kenneth Rogoff (1983) "Empirical exchange
rate models of the seventies: Do they fit out of sample?" Journal
of International Economics, 14, 3-24.
Mark, Nelson (1995) "Exchange rates and Fundamentals:
Evidence on long-horizon predictability" American Economic
Review, 85, 201-218.
MacDonald, Ronald and Ian Marsh (2003) "Currency spillovers
and tripolarity: A simultaneous model of the US dollar, German
mark and Japanese yen" Journal of International Money and
Finance, December 2004.
Cheung, Yin-Wong, Menzie Chinn and Ian Marsh (1999) "How do
UK-based foreign exchange dealers think their market operates?"
Yin Wong Cheung, Menzie Chinn and Antonio Garcia “Empirical
Exchange Rate Models of the 1990's: Are Any Fit to Survive?”
Journal of International Money and Finance 24
Abhay Abhyankar, Lucio Sarno and Giorgio Valente (2005)
“Exchange Rates and Fundamentals: Evidence on the Economic
Value of Predictability” Journal of International Economics, 66,
Ian Marsh, Evgenia Passari and Lucio Sarno (2011) “Purchasing
Power Parity in Tradable Goods” working paper, Cass
Menzie Chinn (2011) “Macro Approaches to Foreign Exchange
Determination” working paper, University of Wisconsin-Madison
Topic 3. Investment Management
How well do professional money mangers manage their currency
Pojarliev and Levich (2012) A new look at currency investing, CFA
Institute, chapters 2-5 (and references therein)
Kendrick and Amen (2012) “Active Currency Management Part 1:
Is there a Premium for Currency Investing (Beta)?”
Levich and Pojarliev (2012) “Active Currency Management Part 2:
Is there Skill or Alpha in Currency Investing?”
Topic 4. Microstructure Approach to Exchange Rates
Given that the macroeconomic approach to explaining and forecasting
exchange rates has performed so poorly, can we do better by looking
at the microeconomics of the dealing room? This is a very new and
very promising topic that unfortunately isn’t in many of the main
MacDonald, chapter 14
Rosenberg, chapter 7
Lyons, Richard (2001) The Microstructure Approach to Exchange
Rates, MIT Press is the main textbook reference.
Have a look at Lyons’ website for many further readings (in
particular see the “Clearinghouse” page)
Lyons, Richard (1998) “Profits and Position Control: A Week of FX
Dealing”, Journal of International Money and Finance, February,
Martin D.D. Evans and Richard K. Lyons (2002) “Order Flow and
Exchange Rate Dynamics,” Journal of Political Economy,
Marsh, Ian, and Ceire O’Rourke (2005), Customer Order Flow and
Exchange Rate Movements: Is There Really Information Content?
Martin Evans and Richard Lyons (2005) “Meese-Rogoff Redux:
Micro-Based Exchange Rate Forecasting” American Economic
Martin Evans and Richard Lyons (2006) “Understanding Order
Flow” International Journal of Finance and Economics
Martin Evans (2006) “Foreign Exchange Market Microstructure” at
Mintao Fan and Richard Lyons (2003) “Customer Trades and
Extreme Events in Foreign Exchange” in Monetary History,
Exchange Rates and Financial Markets: Essays in Honour of
Charles Goodhart at
Topic 5. Exchange Rate Regime Choice
How do countries choose the appropriate regime for their currency?
How do exchange rates behave when governments try to manage
Hallwood and MacDonald, chapters 14 and 15
MacDonald, chapters 12 and 13
Sarno and Taylor, chapter 8
Rosenberg, chapters 14 and 15
Krugman, Paul (1979) "A model of balance of payments crises"
Journal of Money Credit and Banking.
Andrew Rose and Lars Svensson (1993) “European exchange rate
credibility before the fall”
Robert Flood, Andrew Rose and Donald Mathieson (1990) “An
empirical exploration of exchange rate target zones”
Jeffrey Frankel (2011) “Choosing an Exchange Rate Regime”
working paper, Harvard
Andrew Rose (2000) “One Money, One Market” Economic Policy
Jeff Frankel and Andy Rose (1998) “The Endogeneity of the
Optimum Currency Area Criterion” Economic Journal
Reuven Glick and Andy Rose (2002) “Does a Currency Union
Affect Trade?” European Economic Review 46, 1125-1151.
Paul Masson (2011) “The Evolution of Exchange Rate Regimes
and Some Future Perspectives” working paper, University of