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Global Portfolio Rebalancing and Exchange Rates

Author

Listed:
  • Nelson Camanho

    (Catholic University of Portugal and London School of Economics & Political Science)

  • Harald Hau

    (University of Geneva, Swiss Finance Institute; Centre for Economic Policy Research (CEPR), and CESifo (Center for Economic Studies and Ifo Institute))

  • Hélène Rey

    (London Business School, Centre for Economic Policy Research (CEPR), and National Bureau of Economic Research (NBER))

Abstract

We examine international equity allocations at the fund level and show how different returns on the foreign and domestic proportion of portfolios determine rebalancing behavior and trigger capital flows. We document the heterogeneity of rebalancing across fund types, its greater intensity under higher exchange rate volatility, and the exchange rate effect of such rebalancing. The observed dynamics of equity returns, exchange rates, and fund-level capital flows are compatible with a model of incomplete FX risk trading in which exchange rate risk partially segments international equity markets.

Suggested Citation

  • Nelson Camanho & Harald Hau & Hélène Rey, 2018. "Global Portfolio Rebalancing and Exchange Rates," Swiss Finance Institute Research Paper Series 18-03, Swiss Finance Institute, revised Jun 2018.
  • Handle: RePEc:chf:rpseri:rp1803
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    References listed on IDEAS

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    Cited by:

    1. Friederike Niepmann & Tim Schmidt-Eisenlohr, 2019. "Institutional Investors, the Dollar, and U.S. Credit Conditions," International Finance Discussion Papers 1246, Board of Governors of the Federal Reserve System (U.S.).
    2. Raquel Ramos & Federico Bassi & Dany Lang, 2020. "Bet against the trend and cash in profits," CEPN Working Papers halshs-02956879, HAL.
    3. Gordon Y. Liao & Tony Zhang, 2020. "The Hedging Channel of Exchange Rate Determination," International Finance Discussion Papers 1283, Board of Governors of the Federal Reserve System (U.S.).
    4. Ralph S. J. Koijen & Motohiro Yogo, 2020. "Exchange Rates and Asset Prices in a Global Demand System," NBER Working Papers 27342, National Bureau of Economic Research, Inc.
    5. Bergant, Katharina & Fidora, Michael & Schmitz, Martin, 2018. "International capital flows at the security level – evidence from the ECB’s asset purchase programme," ECMI Papers 13926, Centre for European Policy Studies.
    6. Maggiori, Matteo, 2021. "International Macroeconomics With Imperfect Financial Markets," SocArXiv z8g6r, Center for Open Science.
    7. Fong, Tom Pak Wing & Sze, Angela Kin Wan & Ho, Edmund Ho Cheung, 2021. "Assessing cross-border interconnectedness between shadow banking systems," Journal of International Money and Finance, Elsevier, vol. 110(C).
    8. Xavier Gabaix & Ralph S. J. Koijen, 2020. "Granular Instrumental Variables," NBER Working Papers 28204, National Bureau of Economic Research, Inc.
    9. Pierre-Olivier Gourinchas & Hélène Rey & Maxime Sauzet, 2019. "The International Monetary and Financial System," Annual Review of Economics, Annual Reviews, vol. 11(1), pages 859-893, August.
    10. Perez-Reyna, David & Villamizar-Villegas, Mauricio, 2019. "Exchange rate effects of financial regulations," Journal of International Money and Finance, Elsevier, vol. 96(C), pages 228-245.

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    More about this item

    Keywords

    International equity funds; portfolio rebalancing; valuation effects; exchange rates;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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