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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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    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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