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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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Bibliographic Info

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. Charles P. Thomas & Francis E. Warnock & Jon Wongswan, 2004. "The performance of international portfolios," International Finance Discussion Papers 817, Board of Governors of the Federal Reserve System (U.S.).
  2. Cappiello, Lorenzo & De Santis, Roberto A., 2005. "Explaining exchange rate dynamics: the uncovered equity return parity condition," Working Paper Series 0529, European Central Bank.
  3. Gourinchas, Pierre-Olivier & Rey, Hélène, 2005. "International Financial Adjustment," CEPR Discussion Papers 4923, C.E.P.R. Discussion Papers.
  4. Cedric Tille, 2005. "Financial integration and the wealth effect of exchange rate fluctuations," Staff Reports 226, Federal Reserve Bank of New York.
  5. Harald Hau & Hélène Rey, 2006. "Exchange Rates, Equity Prices, and Capital Flows," Review of Financial Studies, Society for Financial Studies, vol. 19(1), pages 273-317.
  6. Chaban, Maxym, 2009. "Commodity currencies and equity flows," Journal of International Money and Finance, Elsevier, vol. 28(5), pages 836-852, September.
  7. Coeurdacier, Nicolas, 2009. "Do trade costs in goods market lead to home bias in equities?," Journal of International Economics, Elsevier, vol. 77(1), pages 86-100, February.
  8. Alan Sutherland & Michael B Devereux, 2007. "Country Portfolio Dynamics," 2007 Meeting Papers 386, Society for Economic Dynamics.
  9. Campbell, John & Calvert, Lauren E. & Sodini, Paolo, 2009. "Fight or Flight? Portfolio Rebalancing by Individual Investors," Scholarly Articles 2617031, Harvard University Department of Economics.
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