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Global Portfolio Rebalancing and Exchange Rates*
Review of Financial Studies, 2022, April. [Open Access: https://doi.org/10.1093/rfs/hhac023]

Camanho, N., Hau, H., Rey, H
Date Published: 2022

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.

Nelson Camanho, Harald Hau, Hélène Rey, Global Portfolio Rebalancing and Exchange Rates, The Review of Financial Studies, 2022 hhac023, https://doi.org/10.1093/rfs/hhac023
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*This material is based upon work supported by ERC Advanced Grant 695722

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