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Can Time-Varying Currency Risk Hedging Explain Exchange Rates?

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  • Bräuer, Leonie
  • Hau, Harald

Abstract

The rise in net international bond positions of non-US investors over the last decade can account for the long-run surge in net dollar hedging positions in FX derivatives. The latter influence spot exchange rates through CIP arbitrage. Using intermediaries’ capital ratio as a supply shifter, we identify a price inelastic derivative demand by institutional investors and document that changes in their net hedging positions can explain approximately 30% of all monthly variation in the seven most important dollar exchange rates from 2012 to 2022.

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  • Bräuer, Leonie & Hau, Harald, 2023. "Can Time-Varying Currency Risk Hedging Explain Exchange Rates?," CEPR Discussion Papers 18516, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:18516
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    Cited by:

    1. Graziano, Marco & Habib, Maurizio Michael, 2024. "Mutual funds and safe government bonds: do returns matter?," Working Paper Series 2931, European Central Bank.

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    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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