Working Paper: CEPR ID: DP15617
Authors: Nelson Camanho; Harald Hau; Hélène Rey
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 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 instrumentalvariable (GIV) approach identi es a currency supply elasticity suggesting that an equity outflow shock of US$7.1 billion depreciates the dollar by 1 percent.
Keywords: No keywords provided
JEL Codes: G23; G15; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| return differential (C69) | foreign equity holding change (dhtf) (F21) |
| FX volatility (F31) | rebalancing behavior of international equity funds (F32) |
| return difference between foreign and domestic equities (F21) | rebalancing response (D74) |
| fund characteristics (Herfindahl-Hirschman Index) (L11) | rebalancing behavior (D91) |
| net portfolio equity flows (F21) | currency appreciation or depreciation (F31) |
| equity outflows (G19) | exchange rate depreciation (F31) |