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Do international equity investors rebalance to manage currency exposure? A study of Greece foreign investor flows data

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Listed author(s):
  • Ülkü, Numan
  • Karpova, Yekaterina

Abstract

Hau and Rey (2006) explain a surprising negative correlation between the stock market and home currency by rebalancing action taken by unhedged international equity investors. Foreign investor flows data from Greece with a nationality-breakdown permit a unique empirical test of the key underlying assumption of their model setup: if rebalancing is driven by the motive of managing currency risk, only non-Eurozone investors should display such rebalancing behavior. Our results do not support this implication of the risk rebalancing hypothesis. We also study the trading behavior and information content of investors from different countries. An interesting finding from this analysis is that investors from Cyprus, island republics (tax havens) and Switzerland behave like domestic investors.

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Article provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.

Volume (Year): 29 (2014)
Issue (Month): C ()
Pages: 150-169

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Handle: RePEc:eee:intfin:v:29:y:2014:i:c:p:150-169
DOI: 10.1016/j.intfin.2013.12.005
Contact details of provider: Web page: http://www.elsevier.com/locate/intfin

Keywords: International equity portfolio flows; Unhedged currency exposure; Risk rebalancing hypothesis; Stock market–exchange rate correlation; Feedback trading;

Find related papers by JEL classification:

  • F31 - International Economics - - International Finance - - - Foreign Exchange
  • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
  • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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Cited by:

  1. Porras, Eva & Ülkü, Numan, 2015. "Foreigners’ trading and stock returns in Spain," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 34(C), pages 111-126.
  2. Dongwon Lee & Kyungkeun Kim, 2016. "Global Risk and International Equity Portfolio Rebalancing," Working Papers 201605, University of California at Riverside, Department of Economics.
  3. Ülkü, Numan & Fatullayev, Sabutay & Diachenko, Daria, 2016. "Can risk-rebalancing explain the negative correlation between stock return differential and currency? Or, does source status drive it?," Journal of Financial Markets, Elsevier, vol. 27(C), pages 28-54.

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