Xiang Fang
Prof. Xiang FANG
Assistant Professor

3917 4178

KK 818



Volatility, Intermediaries, and Exchange Rates

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.

Take Things as They Come: Dr. Xiang FANG

Dr. Fang, specialized in international finance, especially exchange rates and currency related issues, emphasizes that maintaining a peace of mind in teaching and research is important.