Global Portfolio Rebalancing and Exchange Rates

Camanho, N, Hau, H and Rey, H (2022) Global Portfolio Rebalancing and Exchange Rates. Review of Financial Studies, 35 (11). pp. 5228-5274. ISSN 0893-9454 OPEN ACCESS


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.

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Item Type: Article
Subject Areas: Economics
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© The Author(s) 2022. Published by Oxford University Press on behalf of The Society for Financial Studies.

This is an Open Access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted reuse, distribution, and reproduction in any medium, provided the original work is properly cited.

Date Deposited: 28 Apr 2022 16:16
Date of first compliant deposit: 28 Apr 2022
Subjects: Financial markets
Investment funds
Investment appraisal
Foreign exchange markets
Last Modified: 17 Apr 2024 01:46
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