Portfolio Rebalancing in Times of Stress

Andreas Fischer (), Rafael Greminger and Christian Grisse

No 322, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: This paper investigates time variation in the dynamics of international portfolio equity flows. We extend the empirical model of Hau and Rey (2004) by embedding a two-state Markov regime-switching model into the structural VAR. The model is estimated using monthly data, 1995-2015, on equity returns, exchange rate returns and equity flows between the United States and advanced and emerging economies. We find that the data are consistent with portfolio rebalancing. The estimated states match periods of low and high financial stress. Our main result is that for equity flows between the United States and emerging markets, the rebalancing dynamics differ between episodes of high and low levels of financial stress. A switch from the low to the high-stress regime is associated with capital outflows from emerging markets. Once in the high stress regime, the response of capital flows to exchange rate shocks is smaller than in normal (low stress) periods.

JEL-codes: F30 G11 G15 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2017-07-01
New Economics Papers: this item is included in nep-ore
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Related works:
Journal Article: Portfolio rebalancing in times of stress (2021)
Working Paper: Portfolio rebalancing in times of stress (2021)
Working Paper: Portfolio rebalancing in times of stress (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddgw:322

DOI: 10.24149/gwp322

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