Premium
The Portfolio Theory of Exchange Rates—Then and Now
Author(s) -
Black Stanley W.
Publication year - 2015
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/roie.12167
Subject(s) - economics , rational expectations , exchange rate , portfolio , modern portfolio theory , order (exchange) , general equilibrium theory , econometrics , mathematical economics , financial economics , microeconomics , macroeconomics , finance
In the early 1970s, the portfolio theory of exchange rates with rational expectations was introduced to explain the behavior of floating exchange rates. While attractive in principle, the approach failed along with other theories to provide empirically convincing results. Over the years, the theory has been extended to a general equilibrium setting and modified to include central bank intervention and non‐rational expectations. More recently, it has become a platform for the micro‐structural approach emphasizing order flows, which shows increasing promise as an empirical explanation of exchange rate behavior.