Can Portfolio Rebalancing Explain the Dynamics of Equity Returns, Equity Flows, and Exchange Rates?
Harald Hau and
Helene Rey
No 10476, NBER Working Papers from National Bureau of Economic Research, Inc
Abstract:
We explore whether the pattern of international equity returns, equity portfolio flows, and exchange rate returns are consistent with the hypothesis that (unhedged) global investors rebalance their portfolio in order to limit their exchange rate exposure when there are (1) relative equity return and (2) exchange rate shocks. We also explore whether (3) equity flow shocks influence the exchange rates and relative equity prices. In the estimation of the VAR system we do not impose any causal ordering upon the primitive shocks, but instead identify the system based on theoretical priors about the contemporaneous conditional correlations between the three variables. International data for the five largest equity markets are consistent with a theory in which equity returns and portfolio rebalancing are an important source of exchange rate dynamics.
JEL-codes: F30 F31 (search for similar items in EconPapers)
Date: 2004-05
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-ifn
Note: IFM AP
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Citations: View citations in EconPapers (171)
Published as Hau, Harald and Helene Rey. "Can Portfolio Rebalancing Explain The Dynamics Of Equity Returns, Equity Flows, And Exchange Rates?," American Economic Review, 2004, v94(2,May), 126-133.
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Journal Article: Can Portfolio Rebalancing Explain the Dynamics of Equity Returns, Equity Flows, and Exchange Rates? (2004) 
Working Paper: Can Portfolio Rebalancing Explain the Dynamics of Equity Returns, Equity Flows and Exchange Rates? (2004) 
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