NATIONAL BUREAU OF ECONOMIC RESEARCH
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Global Portfolio Rebalancing and Exchange Rates

Nelson Camanho, Harald Hau, Hélène Rey

NBER Working Paper No. 24320
Issued in February 2018
NBER Program(s):Asset Pricing, International Finance and Macroeconomics

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.

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Document Object Identifier (DOI): 10.3386/w24320

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