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Global Portfolio Rebalancing Under the Microscope

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  • Harald Hau
  • Hélène Rey

Abstract

Cross border capital flows and returns on assets are two key variables in international macroeconomics. Difficult endogeneity issues plague any analysis of their correlations in aggregate data. This paper examines the dynamics of international portfolios with a unique data set on the stock allocations of approximately 6,500 international equity funds domiciled in four different currency areas during a 5 year period. The disaggregated data structure allows us to examine the effect of realized returns on portfolio adjustments. Do managers rebalance their portfolios towards their desired weights or do they increase their exposure to appreciating assets? We find strong support for portfolio rebalancing behavior aimed at stabilizing exchange rate risk and equity risk exposure around desired levels. These findings are important for the new open economy macroeconomics models featuring endogenous portfolio choice. They should also help inform the burgeoning theoretical literature in macroeconomics and in finance that aims at modeling financial intermediaries.

Suggested Citation

  • Harald Hau & Hélène Rey, 2008. "Global Portfolio Rebalancing Under the Microscope," NBER Working Papers 14165, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:14165
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    References listed on IDEAS

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    1. Laurent E. Calvet & John Y. Campbell & Paolo Sodini, 2009. "Fight or Flight? Portfolio Rebalancing by Individual Investors," The Quarterly Journal of Economics, Oxford University Press, vol. 124(1), pages 301-348.
    2. Pierre-Olivier Gourinchas & Hélène Rey, 2007. "International Financial Adjustment," Journal of Political Economy, University of Chicago Press, vol. 115(4), pages 665-703, August.
    3. Coeurdacier, Nicolas, 2009. "Do trade costs in goods market lead to home bias in equities?," Journal of International Economics, Elsevier, vol. 77(1), pages 86-100, February.
    4. Thomas, Charles P. & Warnock, Francis E. & Wongswan, Jon, 2004. "The Performance of International Equity Portfolios," International Finance Discussion Papers 817, Board of Governors of the Federal Reserve System (U.S.), revised Oct 2004.
    5. Devereux, Michael B. & Sutherland, Alan, 2010. "Country portfolio dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 34(7), pages 1325-1342, July.
    6. Tille, Cédric, 2008. "Financial integration and the wealth effect of exchange rate fluctuations," Journal of International Economics, Elsevier, vol. 75(2), pages 283-294, July.
    7. Harald Hau & Hélène Rey, 2006. "Exchange Rates, Equity Prices, and Capital Flows," Review of Financial Studies, Society for Financial Studies, vol. 19(1), pages 273-317.
    8. Chaban, Maxym, 2009. "Commodity currencies and equity flows," Journal of International Money and Finance, Elsevier, vol. 28(5), pages 836-852, September.
    9. Cappiello, Lorenzo & De Santis, Roberto A., 2005. "Explaining exchange rate dynamics: the uncovered equity return parity condition," Working Paper Series 529, European Central Bank.
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    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance
    • 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

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