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International portfolio rebalancing and exchange rate fluctuations in Thailand

  • Jacob Gyntelberg
  • Mico Loretan
  • Tientip Subhanij
  • Eric Chan

We present empirical evidence that the Thai exchange rate is driven in part by international investors' cross-border portfolio rebalancing decisions. Our results are based on two comprehensive, daily-frequency datasets of foreign exchange and equity market capital flows undertaken by nonresident investors in Thailand in 2005 and 2006. We find that net purchases of Thai equities by nonresident investors lead to an appreciation of the Thai baht. In addition, higher returns in the Thai equity market relative to a reference stock market are associated both with net sales of Thai equities by these investors and with a depreciation of the Thai baht. Foreign investors do not appear to hedge the foreign exchange risk related to their equity market positions. Despite this, we find that exchange rate movements were not key drivers of nonresident investors' equity market investment choices in our sample period.

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Paper provided by Bank for International Settlements in its series BIS Working Papers with number 287.

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Length: 19 pages
Date of creation: Aug 2009
Date of revision:
Handle: RePEc:bis:biswps:287
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  1. Gehrig, Thomas & Menkhoff, Lukas, 2003. "The use of flow analysis in foreign exchange: exploratory evidence," Hannover Economic Papers (HEP) dp-276, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  2. Cheung, Yin-Wong & Chinn, Menzie & Garcia Pascual, Antonio, 2003. "Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive?," Santa Cruz Department of Economics, Working Paper Series qt5fc508pt, Department of Economics, UC Santa Cruz.
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