Global Portfolio Rebalancing and Exchange Rates. (27th April 2022)

• Record Type: Journal Article
• Authors: Camanho, Nelson; Hau, Harald; Rey, Hélène
• Editors: Koijen, Ralph
• Is Part Of: Review of financial studies. Volume 35:Number 11(2022)
• Page Start: 5228
• Page End: 5274
• Publication Date: 2022-04-27
• Subjects: G11 -- G15 -- G23; Finance -- United States -- Periodicals; Finance -- Periodicals; 332
• DOI: 10.1093/rfs/hhac023
• Languages: English
• ISSNs: 0893-9454

Abstract

Abstract: We examine international equity allocations at the fund level and show how excess foreign returns influence portfolio rebalancing, capital flows, and currencies. Our equilibrium model of incomplete foreign exchange (FX) risk trading where exchange rate risk partially segments international equity markets is consistent with the observed dynamics of equity returns, exchange rates, and fund-level capital flows. We document that rebalancing is more intense under higher FX volatility and find heterogeneous rebalancing behavior across different fund characteristics. A granular instrumental variable approach identifies a positive currency supply elasticity. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.