Can Time-Varying Currency Risk Hedging Explain Exchange Rates?

Leonie Bräuer and Harald Hau

No 10065, CESifo Working Paper Series from CESifo

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 eco-nomic 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)
Date: 2022
New Economics Papers: this item is included in nep-mon, nep-opm and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.cesifo.org/DocDL/cesifo1_wp10065.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 503 Service Unavailable

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)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_10065

Access Statistics for this paper

More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().