International Financial

Markets

Presentation
 Lecture 01
Part I – Overall Course Presentation
• Present
• Programme
• Bibliography
• Course Evaluation Criterion

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 Lecture 0
The Teaching Staff
Professor José Alves (Responsible of the course)

Assistant Professor, Economics Department at ISEG – University of Lisbon;

UECE - Research Unit on Complexity and Economics /
REM – Research in Economics and Mathematics;
CESifo Research Fellow

Contacts:
ISEG - Lisbon School of Economics and Management
Rua Miguel Lupi, 20
1249-078 Lisboa, Portugal
Office: 613
Email: [email protected]
My Personal Website

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 Main objectives of the Lecture 0

Course
This course intends to provide a broader perspective about international
finance.

Specifically, this unit course goal is to provide a comprehensive economic

analysis of macro and microeconomic aspects of foreign exchange.

We will focus on:

• The analysis of the literature on the key financial markets, with

emphasis on the foreign-exchange market;

• The student will become familiar with the roles of the various market
participants and the impact of their actions on financial markets.

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 Mandatory Lecture 0

Bibliography
1. Harris, L. (2003). Trading and Exchanges: Market Microstructure for
Practitioners. Oxford University Press.

2. Krugman, P. R., Obstfeld. M., & Melitz, M. (2022). International

Economics: Theory and Policy (12th Edition). Pearson Education.

3. Lyons, R. (2001). The Microstructure Approach to Exchange Rates.

The MIT Press.

4. Pugel, T. A. (2024). International Economics (18th Edition). McGraw

Hill.

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 Additional Refences Lecture 0

(1/5)
1. Afonso, A., Alves, J., Beck, K., & Jackson, K. (2024). Financial, Institutional,
and Macroeconomic Determinants of Cross-Country Portfolio Equity Flows.
Economic Modelling (Forthcoming).

2. Ahmed, R., Aizenman, J., Saadaoui, J., & Uddin, G. (2023). On the
effectiveness of foreign exchange reserves during the 2021-22 U.S. monetary
tightening cycle. Economics Letters, 233, 111367.
https://doi.org/10.1016/j.econlet.2023.111367

3. Aizenman, J., Ho, S., Huynh, L., Saadaoui, J. (2024). Real exchange rate and
international reserves in the era of financial integration. Journal of
International Money and Finance, 141, 103014.
https://doi.org/10.1016/j.jimonfin.2024.103014

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 Additional Refences Lecture 0

(2/5)
4. Baillie, R., & Bollerslev, T. (1991). Intra-Day and Inter-Market Volatility in
Foreign Exchange Rates. The Review of Economic Studies, 58(3), 565-585.
https://doi.org/10.2307/2298012

5. Daniélsson, J., & Love, R. (2005). Feedback trading. International Journal of

Finance & Economics, 11(1), 35-53. https://doi.org/10.1002/ijfe.286

6. Evans, M., & Lions, R. (2002). Order Flow and Exchange Rate Dynamics.
Journal of Political Economy, 110(1), 170-180. https://doi.org/10.1086/324391

7. Evans, M., & Lyons, R. (2005). Meese-Rogoff Redux: Micro-Based Exchange-

Rate Forecasting. American Economic Review, 95(2), 405-414.
https://doi.org/10.1257/000282805774669934

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 Additional Refences Lecture 0

(3/5)
8. Evans, M., & Lyons, R. (2007). Exchange Rate Fundamentals and Order Flow.
NBER Working Paper 13151.

9. Gole, P., Perego, E., Turcu, C. (2024). UIP deviations in times of uncertainty:
Not all countries behave alike. Economics Letters (Forthcoming).
https://doi.org/10.1016/j.econlet.2024.111848

10. Gourinchas, P., Rey, H. (2013). External Adjustment, Global Imbalances and
Valiation Effects. NBER Working Paper 19240.

11. Lee, C., & Ready, M. (1991). Inferring Trade Direction from Intraday Data. The
Journal of Finance, XLVI(3), 733-846. https://doi.org/10.1111/j.1540-
6261.1991.tb02683.x

12. Lyons, R. (1997). A simultaneous trade model of the foreign exchange hot
potato. Journal of International Economics, 42(3-4), 275-298.
https://doi.org/10.1016/S0022-1996(96)01471-7

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 Additional Refences Lecture 0

(4/5)
13. Marsh, I., & O’Rourke, C. (2005). Customer Order Flow and Exchange Rate
Movements: Is There Really Information Content? Cass Business School
Research Paper

14. Medeiros, E. R. (2013). Economia Internacional (9ª Edição). Escolar Editora.

15. Mende, A., & Menkhoff, L. (2003). Tobin Tax Effects Seen from the Foreign
Exchange Market's Microstructure. International Finance, 6(2), 227-247.
https://doi.org/10.1111/1468-2362.00116

16. Menkhoff, L. & Schmeling, M. (2008). Local information in foreign exchange

markets. Journal of International Money and Finance, 27(8), 1383-1406.
https://doi.org/10.1016/j.jimonfin.2007.10.003

17. Menkhoff, L., Sarno, L., Schmeling, M., Schrimpf, A. (2016). Information Flows
in Foreign Exchange Markets: Dissecting Customer Currency Trades. BIS
Working Papers 405.

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 Additional Refences Lecture 0

(5/5)
18. Osler, C. (2008). FOREIGN EXCHANGE MICROSTRUCTURE A SURVEY
OF THE EMPIRICAL LITERATURE. Mimeo.

19. Peiers, B. (1997). Informed Traders, Intervention, and Price Leadership: A

Deeper View of the Microstructure of the Foreign Exchange Market. The Journal
of Finance, LII(4), 1589-1614. https://doi.org/10.1111/j.1540-6261.1997.tb01122.x

20. Rime, D., Sarno, L., & Sojli, E. (2010). Exchange rate forecasting, order flow
and macroeconomic information. Journal of International Economics, 80(1), 72-88.
https://doi.org/10.1016/j.jinteco.2009.03.005

21. Saadaoui, J. (2018). Internal Devaluations and Equilibrium Exchange Rates:

new evidences and perspectives for the EMU. Applied Economics, 50(59), 6364-
6381. https://doi.org/10.1080/00036846.2018.1486019

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 Availability of Course Lecture 0

Material
• Slides, exercises and eventual other materials will be
available on FENIX webpage;

• Exam corrections will also be posted there (after the

exam, of course).

Please remember: Slides are self-contained, but they DO

NOT substitute the recommended bibliography.

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 Lecture 0
Course Assessment (1/3)
1. Regular Evaluation Period

The Normal Period Assessment is composed by four different elements based on Flipped
classes:

1) A group of students will present a covered topic of the program in the respective
planned week for that topic. The presenting group shall present the contents, review
recent literature on the topics they are covering and present a set of questions to
discuss in the classroom (30% of the final grade). Duration: 1h30 (maximum)

2) Another group of students will be responsible to discuss the presentation. The

discussing group shall discuss the presentation and review relevant literature on the
topics presented in that class that supports and that are against the supporting theory of
the presented topics (20% of the final grade). Duration: 45 mins (maximum)

Note: The groups will be created, and the different topics to present and to discuss will be
set in the first two weeks.

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 Lecture 0
Course Assessment (1/3)

3) Individual participation: Each student is expected to participate in the several classes

when occurring the presentations and the discussions (10% of the final grade). The
remaining students that want to positively contribute with comments, questions, viewpoints
will have 45 mins to interact with both presenting and discussing groups. No proper points
will be attributed to students without added-value participations.

4) Individual exam with a duration of 2 hours (40% of the final grade) with the following
structure:

a) 15 multiple choice questions; 4 options: 1 point for each corrected answer; -0.25
for each wrong answer;

b) 2 discussion questions: 2.5 points each questions based on the topics covered in
the program.

c) No minimum grade.

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 Lecture 0
Course Assessment (1/3)
1. Resit Evaluation Period

Individual exam with a duration of 2 hours with the following structure:

a) 15 multiple choice questions; 4 options: 1 point for each corrected answer; -0.25
for each wrong answer;

b) 2 discussion questions: 2.5 points each questions based on the topics covered in
the program.

c) No minimum grade.

NOTE: The Normal Period assessment components will only count for the resit period
assessment if it helps the student to improve his/her final grade. Otherwise, the resit
period exam counts 100% for the student’s final grade.

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 Lecture 0
The Program
Our course will cover the following topics:
Week Topics Contents
1 0 Presentation
1 External Accounts
2 The Macroeconomic Meaning of the Current Account Balance
2 3 International financial markets
3 4 What Determines Exchange Rates?
4 5 Forward Exchange and International Financial Investment
5 6 Government Policies toward the Foreign Exchange Market
7 Internal and External Balance with Fixed Exchange Rates
8 Floating Exchange Rates and Internal Balance
9 National and Global Choices: Floating Rates and the Alternatives
6 10 The Structure of Trading: Market Structures
7 12 Liquidity Suppliers: Dealers
13 Liquidity Suppliers: Bid/Ask Spreads
8 14 The Microstructure of the Foreign Exchange Market
9 15 Exchange Rate Models: Macro to Microfoundations
16 Macro Puzzles: The Challenge for Microstructure
10 17 Microstructure and Central Bank Intervention
11 18 International Lending and Financial Crises
12 Revisions

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