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Working Paper
Foreign exchange: macro puzzles, micro tools
This paper reviews recent progress in applying information-theoretic tools to long-standing exchange rate puzzles. I begin by distinguishing the traditional public information approach (e.g., monetary models, including new open-economy models) from the newer dispersed information approach. (The latter focuses on how information is aggregated in the trading process.) I then review empirical results from the dispersed information approach and relate them to two key puzzles, the determination puzzle and the excess volatility puzzle. The dispersed information approach has made progress on both.
Working Paper
Sourcing externalities
Working Paper
Is there private information in the FX market? the Tokyo experiment
It is a common view that private information in the foreign exchange market does not exist. We provide evidence against this view. The evidence comes from the introduction of trading in Tokyo over the lunch-hour. Lunch return variance doubles with the introduction of trading, which cannot be due to public information since the flow of public information did not change with the trading rules. Having eliminated public information as the cause, we exploit recent results in microstructure to discriminate between the two alternatives: private information and pricing errors. Three key results ...
Working Paper
Tests of the foreign exchange risk premium using the expected second moments implied by option pricing
This paper applies a new method to investigate the foreign exchange risk premium. The method is new in the sense that it utilizes the time-varying second moment expectations implied by foreign currency option pricing. The vast empirical literature on the risk premium generally neglects the role of time-varying second moments, in spite of their importance in assessing risk-return tradeoffs. In fact, this importance is borne out in the data: time-varying expectations generate valuable new evidence regarding both unbiasedness in the forward rate and portfolio balance models. Moreover, the ...
Journal Article
Foreign exchange: macro puzzles, micro tools
This paper reviews recent progress in applying information-theoretic tools to long-standing exchange rate puzzles. I begin by distinguishing the traditional public information approach (e.g. monetary models, including new open economy models) from the newer dispersed information approach. (The latter focuses on how information is aggregated in the trading process.) I then review empirical results from the dispersed information approach and relate them to two key puzzles, the determination puzzle and the excess volatility puzzle. The dispersed information approach has made progress on both.