Rich Lyons

Home

 

Home 

|

 Working Papers 

|

 Published Articles 

|

 Teaching 

|

New Micro Exchange Rate Economics

|

 Multimedia 

 

 

 

 

Working papers by Rich Lyons in New Micro exchange-rate economics

Forecasting Exchange Rate Fundamentals with Order Flow

Martin D.D. Evans and Richard K. Lyons
July 2009

Abstract
This paper addresses whether transaction flows in foreign exchange markets convey information about fundamentals. We begin with a GE model in the spirit of Hayek (1945) in which fundamental information is first manifest in the economy at the micro level, i.e., in a way that is not symmetrically observed by all agents. With this information structure, induced foreign exchange transactions play a central role in the aggregation process, providing testable links between transaction flows, exchange rates, and future fundamentals. We test these links using data on end-user trades at a major bank over six years, a sample sufficiently long to analyze real-time forecasts at the quarterly horizon. Four findings are both new to the literature and supportive of our model: (1) transaction flows forecast future macro variables such as output growth, money growth, and inflation, (2) transaction flows generally forecast these macro variables better than spot rates do, (3) transaction flows (proprietary) forecast future spot rates, and (4) though flows convey new information about future fundamentals, much of this information is still not impounded in the spot rate one quarter later. The significance of transaction flows for exchange rates appears to extend well beyond high frequencies.

Click here for a copy of the paper in Adobe's PDF format.


An Information Approach to International Currencies

Richard K. Lyons and Michael J. Moore
Forthcoming, Journal of International Economics

August 2008

Abstract
Models of currency competition focus on the 5 percent of trading attributable to balance-of-payments flows. We introduce an information approach that focuses on the other 95 percent. Important departures from traditional models arise when transactions convey information. First, prices reveal different information depending on whether trades are direct or though vehicle currencies. Second, missing markets arise due to insufficiently symmetric information, rather than insufficient transactions scale. Third, the indeterminacy of equilibrium that arises in traditional models is resolved: currency trade patterns no longer concentrate arbitrarily on market size. Empirically, we provide a first analysis of transactions across a full market triangle: the euro, yen and US dollar. The estimated transaction effects on prices support the information approach.

Click here for a copy of the paper in Adobe's PDF format.


Does Intervention Alter Private Behavior?

Eric Girardin and Richard K. Lyons
June 2008

Abstract
A new line of theory posits that intervention in currency markets works indirectly, either by (1) coordinating private trades in the same direction or (2) damping the price impact of private trades. Using daily data on trades from three institution types—hedge funds, mutual funds, and non-financial corporations—we find strong evidence for the coordination channel. Over the period of aggressive Japanese intervention in 2003-04, the trades of corporations and hedge funds shifted significantly in the intervention direction. Evidence for the second, the damping channel, is present in periods when exchange rate stabilization was successful.

Click here for a copy of the paper in Adobe's PDF format.


A New Micro Model of Exchange Rate Dynamics

Martin D.D. Evans and Richard K. Lyons
August 2005 (also NBER Working Paper 10379)

Abstract
We address the puzzle of exchange rate determination by examining how information is aggregated in dynamic general equilibrium (DGE). Unlike other DGE macro models, which enrich either preference structures or production structures, our model enriches the information structure. The model departs from microstructure-style modeling by identifying the real activities where dispersed information originates, as well as the technology by which information is subsequently aggregated and impounded. Results relevant to the determination puzzle include: (1) persistent gaps between exchange rates and macro fundamentals, (2) excess volatility relative to macro fundamentals, (3) exchange rate movements without macro news, (4) little or no exchange rate movement when macro news occurs, and (5) a structural-economic resolution of the "order flow puzzle"--that transaction flows can account for monthly exchange rate changes, whereas macro variables cannot. Though micro analysis has already made progress on results (1) and (2), our results on these points arise for a qualitatively different reason: here, rational exchange rate errors feed back into, and persistently alter, the underlying real fundamentals. Calibrations show that the effects of micro-based information aggregation significantly weaken the empirical link between exchange rates and fundamentals over macro-relevant horizons.

Click here for a copy of the paper in Adobe's PDF format.


Contact Information

Rich Lyons
Dean, Haas School of Business
UC Berkeley
Berkeley, CA 94720-1900
Tel: 510-643-2027
Fax: 510-642-5630
lyons@haas.berkeley.edu

Assistant to the Dean:
Marco Lindsey
Tel: 510-643-2027
Fax: 510-642-5630
marco@haas.berkeley.edu

 

Haas Logo

Rich Lyons

Rich Lyons
Bank of America Dean
Haas School of Business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

This page is not an official publication of the Haas School of Business. It has not been reviewed or approved by the Haas School of Business or the University of California, Berkeley. The page author is solely responsible for the contents of this page.