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Global Portfolio Rebalancing Under the Microscope

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  • Harald Hau
  • Hélène Rey

Abstract

Cross border capital flows and returns on assets are two key variables in international macroeconomics. Difficult endogeneity issues plague any analysis of their correlations in aggregate data. This paper examines the dynamics of international portfolios with a unique data set on the stock allocations of approximately 6,500 international equity funds domiciled in four different currency areas during a 5 year period. The disaggregated data structure allows us to examine the effect of realized returns on portfolio adjustments. Do managers rebalance their portfolios towards their desired weights or do they increase their exposure to appreciating assets? We find strong support for portfolio rebalancing behavior aimed at stabilizing exchange rate risk and equity risk exposure around desired levels. These findings are important for the new open economy macroeconomics models featuring endogenous portfolio choice. They should also help inform the burgeoning theoretical literature in macroeconomics and in finance that aims at modeling financial intermediaries.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14165.

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Date of creation: Jul 2008
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Handle: RePEc:nbr:nberwo:14165

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  1. Coeurdacier, Nicolas, 2006. "Do Trade Costs in Goods Market Lead to Home Bias in Equities?," ESSEC Working Papers, ESSEC Research Center, ESSEC Business School DR 06011, ESSEC Research Center, ESSEC Business School.
  2. Alan Sutherland & Michael B Devereux, 2007. "Country Portfolio Dynamics," 2007 Meeting Papers, Society for Economic Dynamics 386, Society for Economic Dynamics.
  3. Cedric Tille, 2005. "Financial integration and the wealth effect of exchange rate fluctuations," Staff Reports, Federal Reserve Bank of New York 226, Federal Reserve Bank of New York.
  4. Helene Rey & Pierre Olivier Gourinchas, 2005. "International Financial Adjustment," 2005 Meeting Papers, Society for Economic Dynamics 169, Society for Economic Dynamics.
  5. Cappiello, Lorenzo & De Santis, Roberto A., 2005. "Explaining exchange rate dynamics: the uncovered equity return parity condition," Working Paper Series, European Central Bank 0529, European Central Bank.
  6. Charles P. Thomas & Francis E. Warnock & Jon Wongswan, 2004. "The performance of international portfolios," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 817, Board of Governors of the Federal Reserve System (U.S.).
  7. Harald Hau & Helene Rey, 2002. "Exchange Rate, Equity Prices and Capital Flows," NBER Working Papers 9398, National Bureau of Economic Research, Inc.
  8. Chaban, Maxym, 2009. "Commodity currencies and equity flows," Journal of International Money and Finance, Elsevier, Elsevier, vol. 28(5), pages 836-852, September.
  9. Laurent E. Calvet & John Y. Campbell & Paolo Sodini, 2008. "Fight or Flight? Portfolio Rebalancing by Individual Investors," NBER Working Papers 14177, National Bureau of Economic Research, Inc.
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