Handbook of Exchange Rates -- Contents -- Preface -- Contributors -- part one Overview -- 1 Foreign Exchange Market Structure, Players, and Evolution -- 1.1 Introduction -- 1.2 Geography and Composition of Currency Trading -- 1.2.1 Which Currencies are Traded? -- 1.2.2 What Instruments are Traded? -- 1.2.3 How is Trading Regulated? -- 1.3 Players and Information in FX Markets -- 1.3.1 Who Needs Liquidity? -- 1.3.2 Who Provides Liquidity? -- 1.3.3 Asymmetric Information and Exchange Rate Determination -- 1.4 Electronic Trading Revolution in FX Markets -- 1.4.1 The Telephone Era -- 1.4.2 The Rise of the Computer -- 1.4.3 Recent Developments in Electronic Trading -- 1.5 Survey of Multibank FX Platforms -- 1.6 Summary -- Glossary -- Acknowledgments -- References -- 2 Macro Approaches to Foreign Exchange Determination -- 2.1 Introduction -- 2.2 Models of the Nominal Exchange Rate -- 2.2.1 The Monetary Model -- 2.2.2 Portfolio Balance Models -- 2.2.3 Empirical Evidence -- 2.3 Real Models of the Real Exchange Rate -- 2.3.1 Purchasing Power Parity -- 2.3.2 Balassa-Samuelson and Productivity-Based Models -- 2.3.3 Two-Good Models -- 2.4 New Directions in Exchange-Rate Modeling -- 2.4.1 Taking Reaction Functions Seriously -- 2.4.2 The Impact of Financial Globalization -- 2.4.3 The Risk Premium and Order Flow -- 2.5 Conclusions -- Acknowledgments -- References -- 3 Micro Approaches to Foreign Exchange Determination -- 3.1 Introduction -- 3.2 Perspectives on Spot-Rate Dynamics -- 3.2.1 Decomposition of Depreciation Rates -- 3.2.2 Macro- and Microperspectives -- 3.3 Currency Trading Models and their Implications -- 3.3.1 The Portfolio Shifts Model -- 3.3.2 Empirical Implications -- 3.4 Exchange Rates, Order Flows, and the Macro Economy -- 3.4.1 A Micro-Based Macro model -- 3.4.2 Empirical Implications -- 3.5 Conclusion -- Appendix -- 3.6 Acknowledgment.

References -- 4 The Exchange Rate in a Behavioral Finance Framework -- 4.1 Introduction -- 4.1.1 Mainstream Exchange Rate Models -- 4.1.2 Away from the Mainstream -- 4.2 Exchange Rate Puzzles -- 4.2.1 Disconnect Puzzle and Excess Volatility Puzzle -- 4.2.2 Unit Root Property -- 4.2.3 Volatility Clustering -- 4.2.4 Fat-Tailed Distributed Exchange Rate Returns -- 4.3 A Prototype Behavioral Model of the Foreign Exchange Market -- 4.4 Conclusion -- References -- 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 -- 5.3.1 Market Discipline -- 5.3.2 Economic Policy Coordination -- 5.3.3 Integration of Emerging Market Countries into the Global Economy -- 5.4 Trends in Currency Use -- 5.4.1 Global Imbalances and the Financial Crisis of 2007-2009 -- 5.5 Prospects for the Future -- 5.5.1 The Current System -- 5.5.2 Toward a more Managed International Monetary System? -- 5.5.3 How and When Will Reform Occur? -- 5.5.4 A Global Nominal Anchor? -- 5.6 Concluding Comments -- Appendix A: A Formal Test of Hollowing Out -- References -- part two Exchange Rate Models and Methods -- 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 -- 6.3.1 Ancient Period -- 6.3.2 Medieval Period -- 6.3.3 Sixteenth-Century Spain -- 6.4 Techniques of Testing PPP Theory in Economic-History Literature -- 6.4.1 Comparative-Static Computation -- 6.4.2 Regression Analysis -- 6.4.3 Testing for Causality -- 6.4.4 Nonstationarity and Spurious Regression -- 6.4.5 Testing for Stationarity -- 6.4.6 Cointegration Analysis -- 6.5 Price Variable in PPP Computations -- 6.6 Modern Period: Testing of PPP.

6.6.1 Early North America -- 6.6.2 Bullionist Periods -- 6.6.3 Floating Rates-Second-Half of Nineteenth Century -- 6.6.4 Classic Metallic Standards -- 6.6.5 World War I -- 6.6.6 Floating Rates-1920s -- 6.6.7 1930s -- 6.6.8 Interwar Period -- 6.6.9 Spain-Long Term -- 6.6.10 Guatemala-Long Term -- 6.7 Analysis of U.S. Return to Gold Standard in -- 6.8 Establishment and Assessment of a Fixed Exchange Rate in Interwar Period -- 6.8.1 United Kingdom -- 6.8.2 France -- 6.9 Conclusions -- References -- 7 Purchasing Power Parity in Tradable Goods -- 7.1 Introduction -- 7.2 The LOP and Price Indices -- 7.3 Empirical Evidence on the LOP -- 7.3.1 Early Tests of the LOP -- 7.3.2 The Border Effect -- 7.3.3 Barriers to Arbitrage and Nonlinearities -- 7.3.4 The Tradable Versus Nontradable Goods Dichotomy -- 7.3.5 The Aggregation Bias and Micro Price Studies -- 7.4 Purchasing Power Parity -- 7.4.1 Transitory and Structural Disparities from Parity -- 7.5 Aggregating from the LOP to PPP: What Can We Infer? -- 7.5.1 An Eyeball Analysis of PPP -- 7.6 Conclusion and Implications -- Appendix: TAR Modeling -- Acknowledgments -- References -- 8 Statistical and Economic Methods for Evaluating Exchange Rate Predictability -- 8.1 Introduction -- 8.2 Models for Exchange Rate Predictability -- 8.2.1 A Present Value Model for Exchange Rates -- 8.2.2 Predictive Regressions -- 8.3 Statistical Evaluation of Exchange Rate Predictability -- 8.4 Economic Evaluation of Exchange Rate Predictability -- 8.4.1 The Dynamic FX Strategy -- 8.4.2 Mean-Variance Dynamic Asset Allocation -- 8.4.3 Performance Measures -- 8.4.4 Transaction Costs -- 8.5 Combined Forecasts -- 8.6 Empirical Results -- 8.6.1 Data on Exchange Rates and Economic Fundamentals -- 8.6.2 Predictive Regressions -- 8.6.3 Statistical Evaluation -- 8.6.4 Economic Evaluation -- 8.7 Conclusion -- Appendix A: The Bootstrap Algorithm.

Acknowledgments -- References -- 9 When Are Pooled Panel-Data Regression Forecasts of Exchange 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 -- 9.3.1 Predictive Regression Estimated on Full Sample -- 9.3.2 Out-of-Sample Prediction -- 9.4 Monte Carlo Study -- 9.5 An Illustration with Data -- 9.6 Conclusions -- References -- 10 Carry Trades and Risk -- 10.1 Introduction -- 10.2 The Carry Trade: Basic Facts -- 10.2.1 What is a Carry Trade? -- 10.2.2 Measuring the Returns to the Carry Trade -- 10.3 Pricing the Returns to the Carry Trade -- 10.4 Empirical Findings -- 10.4.1 Traditional Risk Factors -- 10.4.2 Factors Derived from Currency Returns -- 10.5 Time-Varying Risk and Rare Events -- 10.6 Conclusion -- Acknowledgments -- References -- 11 Currency Fair Value Models -- 11.1 Introduction -- 11.2 Models/Taxonomy -- 11.2.1 "Adjusted PPP": Harrod-Balassa-Samuelson and Penn Effects -- 11.2.2 The Behavioral Equilibrium Exchange Rate Family of Models -- 11.2.3 The Underlying Balance (UB) Approach -- 11.2.4 External Sustainability (ES) Approach -- 11.2.5 The Natural Real Exchange Rate (NATREX) -- 11.2.6 The Indirect Fair Value (IFV) -- 11.3 Implementation Choices and Model Characteristics -- 11.3.1 Horizon/Frequency -- 11.3.2 Direct Econometric Estimation Versus "Methods of Calculation" -- 11.3.3 Treatment of External Imbalances -- 11.3.4 Real Versus Nominal Exchange Rates -- 11.3.5 Bilateral Versus Effective Exchange Rate -- 11.3.6 Time Series Versus Cross Section or Panel -- 11.3.7 Model Maintenance -- 11.4 Conclusion -- Acknowledgments -- References -- 12 Technical Analysis in the Foreign Exchange Market -- 12.1 Introduction -- 12.2 The Practice of Technical Analysis.

12.2.1 The Philosophy of Technical Analysis -- 12.2.2 Types of Technical Analysis -- 12.3 Studies of Technical Analysis in the Foreign Exchange Market -- 12.3.1 Why Study Technical Analysis? -- 12.3.2 Survey Evidence on the Practice of Technical Analysis -- 12.3.3 Computing Signals and Returns -- 12.3.4 Early Studies: Skepticism before the Tide Turns -- 12.3.5 Pattern Recognition, Intraday Data, and Other Exchange Rates -- 12.4 Explaining The Success of Technical Analysis -- 12.4.1 Data Snooping, Publication Bias, and Data Mining -- 12.4.2 Temporal Variation in Trading Rule Returns -- 12.4.3 Do Technical Trading Returns Compensate Investors for Bearing Risk? -- 12.4.4 Does Foreign Exchange Intervention Create Trading Rule Profits? -- 12.4.5 Do Cognitive Biases Create Trading Rule Profits? -- 12.4.6 Do Markets Adapt to Arbitrage Away Trading Rule Profits? -- 12.5 The Future of Research on Technical Analysis -- 12.6 Conclusion -- Acknowledgments -- References -- 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 -- Acknowledgments -- References -- 14 Exchange Rates in a Stochastic Discount Factor Framework -- 14.1 Introduction -- 14.2 Exchange Rates and Stochastic Discount Factors -- 14.2.1 Stochastic Discount Factors -- 14.2.2 Real Exchange Rates and Currency Risk Premia -- 14.3 Empirical Evidence -- 14.3.1 From UIP Regressions to Currency Portfolios -- 14.3.2 Annual Currency Excess Returns and Aggregate Risk -- 14.3.3 Monthly Currency Excess Returns -- 14.3.4 Implications for Stochastic Discount Factors -- 14.3.5 Predictability of Currency Excess Returns -- 14.4 Models -- 14.4.1 Habits -- 14.4.2 Long-Run Risk -- 14.4.3 Disaster Risk -- 14.5 Conclusion -- References.

15 Volatility and Correlation Timing in Active Currency Management.