We propose and estimate a quantitative model of exchange rates in which participants in the foreign exchange market are intermediaries subject to value-at-risk (VaR) constraints. Higher volatility translates into tighter VaR constraints, and intermediaries require higher returns to hold foreign assets. Therefore, the foreign currency is expected to appreciate. The model quantitatively resolves the Backus–Smith puzzle, the forward premium puzzle, and the exchange rate volatility puzzle and explains deviations from the covered interest rate parity. Moreover, the model implies both contemporaneous and predictive relations between proxies of leverage constraint tightness and exchange rates. These implications are supported in the data.
- Ph.D., University of Pennsylvania, 2019
- M.A. in Economics, Tsinghua University, 2013
- B.A. in Economics, Fudan University, 2011
Dr. Xiang Fang received his Ph.D. degree in economics from the University of Pennsylvania in 2019. He obtained his M.A. in economics from Tsinghua University in 2013, and his B.A. in economics from Fudan University in 2011. He joined HKU in 2019.
He is interested in broad topics in international finance, asset pricing, and their connections to the macro economy, especially the crucial role of financial intermediaries.
International Finance, Asset Pricing, Macro-Finance
- “Bank Capital Requirements and Lending in Emerging Markets: The Role of Bank Characteristics and Economic Conditions,” (with David Jutrsa, Soledad Martinez Peria, Andrea F. Presbitero and Lev Ratnovski), Journal of Banking & Finance, Volume 135, February 2022, Article 105806
- “Volatility, Intermediaries, and Exchange Rates,” (with Yang Liu), Journal of Financial Economics, Volume 141, Issue 1, July 2021, Pages 217-233
- “Intermediary Leverage and Currency Risk Premium”
For more details, please visit my webpage at https://leonyangyu.weebly.com/
The Cubist Systematic Strategies Ph.D. Candidate Award for Outstanding Research, WFA 2017