Can Time-Varying Currency Risk Hedging Explain Exchange Rates?

Leonie Bräuer and Harald Hau

No 22-77, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Over the last decade foreign bond portfolio positions in US dollar assets have risen above the reciprocal US investor positions in foreign currencies. In periods of increased economic uncertainty, institutional investors hedge their international bond positions, which creates a net hedging demand for dollar assets that depreciates USD rates in both the forward and spot markets. We document the time-varying nature of this net hedging demand and show how it relates to economic uncertainty and the US net foreign bond position in various currencies. Based on a parsimonious VAR model, we find that changes in FX hedging pressure can account for approximately 30% of all monthly variation in the seven most important dollar exchange rates from 2012 to 2022.

Keywords: Exchange Rate; Hedging Channel; Institutional Investors (search for similar items in EconPapers)
JEL-codes: E44 F31 F32 G11 G15 G23 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2022-10
New Economics Papers: this item is included in nep-ifn, nep-mon, nep-opm and nep-rmg
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Can Time-Varying Currency Risk Hedging Explain Exchange Rates? (2023)
Working Paper: Can Time-Varying Currency Risk Hedging Explain Exchange Rates? (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2277

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