This paper provides new perspective on the poor performance of exchange rate models by focusing on the information structure of FX trading. I present a new theoretical model of FX trading that emphasizes the role of incomplete and heterogeneous information. The model shows how an equilibrium...

This paper presents a new explanation for the negative correlation between ex post real interest rates and inflation found in earlier empirical studies. We begin by showing that there is a strong negative correlation between the permanent movements in ex post real interest rates and inflation....

Under conventional notions about rational expectations and market efficiency, expected returns differ from the actual expost returns by a forecast error that is uncorrelated with current information. In this paper, we describe how small departures from conventional notions of rational...

Theoretical and empirical studies have treated excess returns as processes with time-varying but temporary disturbances. By contrast, empirical evidence indicates that the behavior of asset price levels can be well-approximated by processes with some permanent disturbances. These two...

Most studies of the expectations theory of the term structure reject the model. However, the significance of the rejections depend strongly upon the form of the test. In this paper, we use the pattern of rejection across maturities to back out the implied behavior of time-varying risk premia...

This paper uses modern asset pricing theory to examine the behavior of short-term nominal interest rates over the past 25 years. The analysis investigates whether variation in the stochastic behavior of output and inflation can explain movements in the rate of interest. Our results reveal that...

This paper tests whether macroeconomic news is transmitted to exchange rates via the transactions process and if so, what share occurs via transactions versus the traditional direct channel. We identify the link between order flow and macro news using a heteroskedasticity-based approach, a la...

We address whether transaction flows in foreign exchange markets convey fundamental information. Our GE model includes fundamental information that first manifests at the micro level and is not symmetrically observed by all agents. This produces foreign exchange transactions that play a central...

This paper develops a model for understanding end-user order flow in the FX market. The model addresses several puzzling findings. First, the estimated price-impact of flow from different end-user segments is, dollar-for-dollar, quite different. Second, order flow from segments traditionally...

International capital flows have increased dramatically since the 1980s, with much of the increase being due to trade in equity and debt markets. Such developments are often attributed to the increased integration of world financial markets. We present a model that allows us to examine how...