Portfolio reallocation and exchange rate dynamics

Liang Ding and Jun Ma

Journal of Banking & Finance, 2013, vol. 37, issue 8, 3100-3124

Abstract: This paper explains exchange rate dynamics by linking financial customers’ foreign exchange order flow with their dynamic portfolio reallocation. For any currency pair in a particular period, one currency has higher assets return than the other and can be considered the high-return-currency (HRC). Financial institutions attempt to hold more HRC assets when they become more risk-loving or the relative return of the assets is expected to increase. Such a portfolio reallocation generates buy order toward the HRC and the currency appreciates. As the HRC changes over time, the direction that the relative return and risk appetite affect the exchange rate varies in different regimes.

Keywords: Exchange rate dynamics; Portfolio rebalance; Carry trade; Risk appetite; High return currency (search for similar items in EconPapers)
JEL-codes: F31 G11 G15 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:37:y:2013:i:8:p:3100-3124

DOI: 10.1016/j.jbankfin.2013.02.035

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