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Global portfolio rebalancing and exchange rates

Journal

Review of Financial Studies

Subject

Economics, Economics

Publishing details

Review of Financial Studies 2022 Vol 35:11 p 5228-5274

Authors / Editors

Camanho N;Hau H;Rey H

Biographies

Helene Rey

Publication Year

2022

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.

Available on ECCH

No


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