HU Credits: 4

Degree/Cycle: 2nd degree (Master)

Responsible Department: Economics

Semester: 2nd Semester

Teaching Languages: English

Campus: Mt. Scopus

Course/Module Coordinator: Alexey Khazanov

Coordinator Email: alexey.khazanov@mail.huji.ac.il

Coordinator Office Hours:

Teaching Staff:
Dr. Alexey Khazanov

Course/Module description:
This course aims to introduce students to the main topics studied in the field of International Fi- nance. It covers the major empirical “puzzles” discovered in the data, and offers model-based explanations introduced in the literature.
Namely, we will start from studying the international business cycles. We will discuss the lack of cross-country risk-sharing and the global factors behind business cycles in different countries. Next, we will move to discussing the properties of international portfolios. We will ask why in- ternational investors are biased towards their domestic economies, and what frictions can explain that.
The third topic concerns exchange rates. We will cover the main puzzles in exchange rates’ dynam- ics and will discuss what we know about the determination of exchange rates.
The last topic is the sovereign default. Why can countries sustain high levels of debt and what are the costs of defaulting? What motivates countries to issue debt of certain maturity, and how does debt renegotiation work? We will solve simple models with default, and then discuss how to assess the issue of sovereign default quantitatively.
This course would primarily be of interest to those planning to work in the field of finance and macroeconomics.

Course/Module aims:

Learning outcomes - On successful completion of this module, students should be able to:
Identify puzzling patterns in the international macro and finance data that are not consistent with the baseline theories.
Analyze developing and developed countries' level of sovereign default risk.
Integrate the insights about the international portfolio allocation into wider framework of asset management.
Formulate the main theories concerning currency dominance and safe assets issuance.
Develop better understanding of exchange rate dynamics.

Attendance requirements(%):
80%

Teaching arrangement and method of instruction:

Course/Module Content:
Topic 1. International Business Cycles
1. Introduction. Main facts and sources
2. Two-country models
3. Risk-sharing (Backus-Smith) puzzle
Topic 2. Portfolio choice and capital flows
1. The Home Bias Puzzle and Portfolio Underdiversification: Introduction
2. The Home Bias Puzzle and Portfolio Underdiversification: Analysis
3. Global Imbalances and Dollar Dominance
Topic 3. Exchange rates
1. Uncovered Interest Rate Parity (UIP) Puzzle
2. Solving the UIP puzzle
3. Evidence on risk-based UIP Models
4. Deviations from rational expectations
5. The Exchange Rate Determination Puzzle
Topic 4. Sovereign Default
1. The canonical framework
2. Maturity choice
3. Renegotiation
4. Partial defaults
5. Secondary markets

Required Reading:
(for proper formatting see the pdf syllabus)


Feldstein and Horioka (1980), “Domestic Savings and International Capital Flows”, The Economic Journal
Rey (2015), “Dilemma not Trilemma: The Global Financial Cycle and Monetary Pol- icy Independence”, NBER working paper.
Backus, Kehoe, and Kydland (1993), “International Business Cycles”, JPE
ObstfeldandRogoff(2001),“TheSixMajorPuzzlesinInternationalMacroeconomics: Is There a Common Cause?”, NBER Macroeconomics Annual
6) Engel (2001), “Comment: The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?”, NBER Macro Annual
1) BackusandSmith(1993),“ConsumptionandRealExchangeRatesinDynamicEconomies
with Non-Traded Goods”, JIE
Baxter and Jermann (1997), “The International Diversification Puzzle is Worse Than You Think”, AER

1) VanNieuwerburghandVeldkamp(2010),“InformationAcquisitionandUnder-Diversification”,
REStud
2) De Marco, Macchiavelli, Valchev (2018), “Beyond Home Bias – Portfolio Holdings and Information Heterogeneity”

2) Chahrour and Valchev (2018), “The International Medium of Exchange”

5) Gopinath, G. (2015). “The international price system”. NBER WP
6) He, Z., A. Krishnamurthy, and K. Milbradt (2016): A model of safe asset determina-
tion. NBER WP.

8) Maggiori, M. (2017): Financial Intermediation, International Risk Sharing, and Reserve Currencies,

1) Fama (1984), “Forward and Spot Exchange Rates”, JME

Kalemli-Ozcan and Varela (2021), “Five Facts about the UIP Premium”

1) Verdelhan(2010)“AHabit-BasedExplanationoftheExchangeRateRiskPremium”,
JF
2) Hassan (2013), “Country Size, Currency Unions, and International Asset Returns”, JF

Additional Reading Material:
(for proper formatting see the pdf syllabus)

Topic 1. International Business Cycles
1. Introduction. Main facts and sources
1) Ambler, Cardia and Zimmermann (2004), “International Business Cycles: What are the facts”, Journal of Monetary Economics
2) Backus, Kehoe, and Kydland (1993), “International Business Cycles: Theory and Evi- dence”, NBER Working Paper 4493
3) Feldstein and Horioka (1980), “Domestic Savings and International Capital Flows”, The Economic Journal
4) Huo,LevchenkoandPandalai-Nayar(2019),“TheGlobalBusinessCycle:Measurement and Transmission”
5) Rey (2015), “Dilemma not Trilemma: The Global Financial Cycle and Monetary Pol- icy Independence”, NBER working paper.
2. Two-country models
1) Backus, Kehoe, and Kydland (1993), “International Business Cycles”, JPE
2) Stockman and Tesar (1995), “Tastes and Technology in a Two-Country Model of the
Business Cycle: Explaining International Comovements”, AER
3) Baxter and Crucini (1993), “Explaining Saving-Investment Correlations”, AER
4) BaiandZhang(2010),“SolvingtheFeldstein-HoriokaPuzzlewithFinancialFrictions”, Econometrica
5) ObstfeldandRogoff(2001),“TheSixMajorPuzzlesinInternationalMacroeconomics: Is There a Common Cause?”, NBER Macroeconomics Annual
6) Engel (2001), “Comment: The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?”, NBER Macro Annual
2
7) Baxter (1995), “International Trade and Business Cycles”, NBER Working paper 5025
8) Rabanal, Rubio-Ramirez and Tuesta (2011), “Cointegrated TFP processes and interna- tional business cycles”
9) Baxter and Crucini (1995), “Business Cycles and the Asset Structure of Foreign Trade”, IER
10) Backus, Kehoe and Kydland (1994), “Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?”, AER
11) Kose, Otrok, and Whiteman (2003), “International Business Cycles: World, Region and Country-Specific Factors”, AER
12) Marcet and Ravn (2004), “The HP-filter in Cross-Country Comparisons”, Working Pa- per
3. Risk-sharing (Backus-Smith) puzzle
1) BackusandSmith(1993),“ConsumptionandRealExchangeRatesinDynamicEconomies
with Non-Traded Goods”, JIE
2) Corsetti, Dedola and Leduc (2008), “International Risk-Sharing and the Transmission of Productivity Shocks”, REStud
3) Brandt, Cochrane, Santa-Clara, “International Risk-Sharing is Better than You Think, or Exchange Rates are too Smooth”, JME
4) Burnside and Graveline (2012), “Exchange Rate Determination, Risk Sharing and the Asset Market View”, Working Paper
Topic 2. Portfolio choice and capital flows
1. The Home Bias Puzzle and Portfolio Underdiversification: Introduction
1) Baxter and Jermann (1997), “The International Diversification Puzzle is Worse Than You Think”, AER
2) FrenchandPoterba(1991),“InvestorDiversificationandInternationalEquityMarkets”, AER
3) Ahearne,GrieverandWarnock(2004),“InformationCostsandHomeBias:AnAnalysis of US Holdings of Foreign Equities”, JIE
4) Bekaert, Hodrick and Zhang (2009), “ International Stock Return Comovements”, JF
5) Wincoop and Warnock (2010), “Can Trade Costs in Goods Explain Home Bias in As- sets?”, JIMF
6) Massa and Simonov (2006), “Hedging, Familiarity and Portfolio Choice”, RFS 3

7) Kang and Stulz (1997), “Why is There a Home Bias? An Analysis of Foreign Portfolio Equity Ownership in Japan”, JFE
2. The Home Bias Puzzle and Portfolio Underdiversification: Analysis
1) VanNieuwerburghandVeldkamp(2010),“InformationAcquisitionandUnder-Diversification”,
REStud
2) De Marco, Macchiavelli, Valchev (2018), “Beyond Home Bias – Portfolio Holdings and Information Heterogeneity”
3) CoeurdacierandRey(2012),“HomeBiasinOpenEconomyFinancialMacroeconomics”, JEL
4) Coeurdacier and Gourinchas (2011), “When Bonds Matter: Home Bias in Goods and Assets”, NBER Working Paper 17560
5) Lewis (1999), “Trying to Explain Home Bias in Equities and Consumption”, JEL
6) Devereux and Sutherland (2010), “Country Portfolio Dynamics”, JIE
7) BrennanandCao(1997),“InternationalPortfolioInvestmentFlows”,JournalofFinance
8) Berriel and Bhattarai (2014), “Hedging Against the Government: A Solution to the Home Asset Bias Puzzle”, Working Paper
9) vanNieuwerburghandVeldkamp(2009),“InformationImmobilityandtheHomeBias Puzzle”, Journal of Finance
10) PesentiandvanWincoop,“CanNontradablesGenerateSubstantialHomeBias?”,JMCB
11) Heathcote and Perri, “The International Diversification Puzzle is Not as Bad as You Think”,
12) Valchev (2017), “Dynamic Information Acquisition and Portfolio Bias”, Working Paper
3. Global Imbalances and Dollar Dominance
1) Gourinchas,P.-O.andH.Rey(2019):TheInternationalMonetaryandFinancialSystem, Annual Review of Economics
2) Chahrour and Valchev (2018), “The International Medium of Exchange”
3) Chahrour and Valchev, (2022). “Trade Finance and Durability of the Dollar”. REStud
4) Gourinchas, P.-O. and H. Rey (2007): From world banker to world venture capitalist: US external adjustment and the exorbitant privilege,
5) Gopinath, G. (2015). “The international price system”. NBER WP
6) He, Z., A. Krishnamurthy, and K. Milbradt (2016): A model of safe asset determina-
tion. NBER WP.
7) Obstfeld and Rofogg(2005), “Global Current Account Imbalances and Exchange Rate Adjustments”
4

8) Maggiori, M. (2017): Financial Intermediation, International Risk Sharing, and Re- serve Currencies,
9) Farhi, E. and M. Maggiori (2016): A Model of the International Monetary System.
Topic 3. Exchange rates
1. Uncovered Interest Rate Parity (UIP) Puzzle
1) Fama (1984), “Forward and Spot Exchange Rates”, JME
2) Burnside, Eichenbaum and Rebelo (2008), “Carry Trade: The Gains of Diversification”,
JEEA
3) Burnside, Eichenbaum, Kleshchelski, and Rebelo (2010), “Do Peso Problems Explain the Returns to the Carry Trade”, RFS
4) Kalemli-Ozcan and Varela (2021), “Five Facts about the UIP Premium”
5) Engel (2013), “Exchange Rates and Interest Parity”, NBER Working Paper 19336
6) JordaandTaylor(2012),“TheCarryTradeandFundamentals:NothingtoFearbutFEER itself”, JIE
7) Froot and Frankel (1989), “Forward Discount Bias: Is it an Exchange Risk Premium”, QJE
8) Engel (2016), “Exchange Rates, Interest Rates, and the Risk Premium”, AER
9) Hassan and Mano (2019) , “Forward and Spot Exchange Rates in a Multi-Currency World”, QJE, 2019
2. Solving the UIP puzzle
1) Verdelhan(2010)“AHabit-BasedExplanationoftheExchangeRateRiskPremium”,
JF
2) Hassan (2013), “Country Size, Currency Unions, and International Asset Returns”, JF
3) Bansal and Shaliastovich (2012), “A Long-Run Risks Explanation of Predictability Puz- zles in Bond and Currency Markets”, RFS
4) Alvarez, Atkeson and Kehoe (2009), “Time-Varying Risk, Interest Rates and Exchange Rates in General Equilibrium”, REStud
5) Farhi and Gabaix (2016). “Rare disasters and exchange rates”, QJE
3. Evidence on risk-based UIP Models
5

1) Burnside(2011),“CarryTradesandRisk”,NBERWorkingPaper17278AdditionalRead- ings
2) Lustig and Verdelhan (2007), “The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk”, AER
3) Burnside (2010), “The Cross-Section of Foreign Currency Risk Premia and Consump- tion Growth Risk: Comment”, AER
4) Backus, Foresi and Telmer (2001), “Affine Term Structure Models and the Forward Pre- mium Anomaly”, JF
5) Menkhoff , Sarno, Schmeling, and Schrimpf (2012), “Carry Trades and Global Foreign Exchange Volatility”, JF
6) Lustig,RoussanovandVerdelhan(2007),“CommonRiskFactorsinCurrencyMarkets”, RFS
7) Burnside(2010),“IdentificationandInferenceinLinearStochasticDiscountFactorMod- els with Excess Returns”, NBER Working Paper 16634
8) Burnside (2013), “Carry Trade Reconsidered”, Working Paper
9) ColacitoandCroce(2013),“InternationalAssetPricingwithRecursivePreferences”,JF
10) Farhi and Gabaix (2015), “Rare Disasters and Exchange Rates”, Working Paper
11) Gabaix and Maggiori (2014), “International Liquidity and Exchange Rate Dynamics”
4. Deviations from rational expectations
1) GourinchasandTournell(2004),“ExchangeRatePuzzlesandDistortedBeliefs”,JIE
2) Bacchetta and van Wincoop (2010), “Infrequent Portfolio Decisions: A Solution to the Forward Discount Puzzle”, AER
3) Bacchetta and van Wincoop (2019), “Puzzling Exchange Rate Dynamics and Delayed Portfolio Adjustment”, AER
4) Burnside, Han, Hirshleifer, and Wang (2013), “Investor Overconfidence and the For- ward Premium Puzzle, REStud
5) Ilut (2012), “Ambiguity Aversion: Implications for the Uncovered Interest Rate Parity Puzzle”, AEJ:Macro
5. The Exchange Rate Determination Puzzle
1) Itskhoki and Mukhin (2019), “Exchange Rate Disconnect in General Equilibrium”.
JPE
2) Chahrour,Cormun,DeLeo,Guerron-Quintana,andValchev(2021),“ExchangeRate Disconnect Redux”. Working paper
6

3) Meese Rogoff (1983), “Empirical Exchange Rate Models of the Seventies”, JIE
4) Mark(1995),“ExchangeRatesandFundamentals:EvidenceonLong-HorizonPredictabil-
ity”, AER
5) Engel and West (2005), “Exchange Rates and Fundamentals”, JPE
6) Grkaynak, Kara, Ksackolu and Lee “Monetary Policy Surprises and Exchange Rate Be- havior”
7) Bai and Rios-Rull (2015), “Demand Shocks and Open Economy Puzzles”
8) Evans and Lyons (2002), “Order Flow and Exchange Rate Dynamics”, JPE
9) Bacchetta and van Wincoop (2013), “On the Unstable Relationship Between Exchange Rates and Macoeconomic Fundamentals”, JIE
10) Evans and Rime (2011), Micro Approaches to Foreign Exchange Determination, Work- ing Paper (survey paper)
11) Berger,Chaboud,Chernenko,Howorka,andWright(2005),“OrderFlowandExchange Rate Dynamics in Electronic Brokerage System Data”, JIE
Topic 4. Sovereign Default
1. The canonical framework
1) Eaton and Gersovitz (1981), “Debt with potential repudiation: Theoretical and em-
pirical analysis”. REStud
2) Cole and Kehoe (2000). “Self-fulfilling debt crises”. REStud
3) Bulow and Rogoff (1989), “A constant recontracting model of sovereign debt”. JPE
2. Maturity choice
1) Hatchondo and Martinez (2009), “Long-duration bonds and sovereign defaults”. JIE.
2) Arellano and Ramanarayanan (2012). “Default and the maturity structure in sovereign bonds”. JPE.
3) Satyajit and Eyigungor (2012), "Maturity, Indebtedness, and Default Risk." AER
3. Renegotiation Yue, (2010). "Sovereign default and debt renegotiation," JIE 4. Partial defaults
1) Arellano, Mateos-Planas, Rios-Rull (2019). “Partial default”. NBER WP. 5. Secondary markets
1) Broner, Martin, and Ventura (2010). “Sovereign risk and secondary markets”. AER 7

6. Multiplicity
1) Lorenzoni and Werning (2019). “Slow moving debt crises”. AER, 2019
For further reading o sovereign default see an excellent list of papers compiled by Gabriel Miha- lache
https://www.gmihalache.com/teaching/sov-debt-and-default/

Grading Scheme :
Presentation / Poster Presentation / Lecture/ Seminar / Pro-seminar / Research proposal 40 %
Active Participation / Team Assignment 10 %
Submission assignments during the semester: Exercises / Essays / Audits / Reports / Forum / Simulation / others 50 %

Additional information: