School of Economics and Finance
Queen Mary University of London
Mile End Road
Institutional Affiliation: Queen Mary University of London
NBER Working Papers and Publications
|February 2018||Global Portfolio Rebalancing and Exchange Rates|
with Harald Hau, Hélène Rey: w24320
We examine international equity allocations at the fund level and show how different returns on the foreign and domestic proportion of portfolios determine rebalancing behavior and trigger capital flows. We document the heterogeneity of rebalancing across fund types, its greater intensity under higher exchange rate volatility, and the exchange rate effect of such rebalancing. The observed dynamics of equity returns, exchange rates, and fund-level capital flows are compatible with a model of incomplete FX risk trading in which exchange rate risk partially segments international equity markets.