Global Portfolio Rebalancing and Exchange Rates

Helene Rey, Nelson Camanho and Harald Hau

No 15617, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We examine international equity allocations at the fund level and show how excess foreign returns influence portfolio rebalancing, capital flows and currencies. Our equilibrium model of incomplete FX risk trading where exchange rate risk partially segments international equity markets is consistent with the observed dynamics of equity returns, exchange rates, and fund-level capital flows. We document that rebalancing is more intense under higher FX volatility and Â…find heterogeneous rebalancing behavior across different fund characteristics. A granular instrumental variable (GIV) approach identiÂ…es a currency supply elasticity suggesting that an equity outflow shock of US$7.1 billion depreciates the dollar by 1 percent.

Date: 2020-12
New Economics Papers: this item is included in nep-ifn and nep-opm
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Related works:
Journal Article: Global Portfolio Rebalancing and Exchange Rates (2022)
Working Paper: Global Portfolio Rebalancing and Exchange Rates (2018)
Working Paper: Global Portfolio Rebalancing and Exchange Rates (2018)
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