Working Paper: CEPR ID: DP18516
Authors: Leonie Bruer; Harald Hau
Abstract: The rise in net international bond positions of non-US investors over the last decade can account for the long-run surge in net dollar hedging positions in FX derivatives. The latter influence spot exchange rates through CIP arbitrage. Using intermediaries’ capital ratio as a supply shifter, we identify a price inelastic derivative demand by institutional investors and document that changes in their net hedging positions can explain approximately 30% of all monthly variation in the seven most important dollar exchange rates from 2012 to 2022.
Keywords: exchange rate; hedging; channel; institutional investors
JEL Codes: E44; F31; F32; G11; G15; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| changes in net hedging positions (F31) | variation in dollar exchange rates (F31) |
| 10 percentage point increase in monthly hedging pressure (F31) | 5% depreciation of the dollar rate (F31) |
| 1 dollar appreciation (F31) | 0.49 reduction in net hedging demand for dollar positions (F31) |
| positive shocks to hedging pressure (F31) | strong dollar depreciation (F31) |