Citation

Discussion Paper Details

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Title: Global Portfolio Rebalancing Under the Microscope

Author(s): Harald Hau and Hélène Rey

Publication Date: July 2008

Keyword(s): capital flows, home bias and International Finance

Programme Area(s): Financial Economics and International Macroeconomics

Abstract: The dramatic increase in gross stock of foreign assets and liability has revived interest in the portfolio balance theory of international investment. Evidence on the validity of this theory has always been scarce and inconclusive. The current paper derives testable empirical implications from microeconomic foundations, which we confront with a new comprehensive data set on the stock allocations of approximately 6,500 international equity funds domiciled in four different currency areas. The disaggregated data structure allows us to examine whether foreign exchange and equity risk measures trigger the predicted rebalancing behavior at the fund and stock level. The data provide strong support for portfolio rebalancing behavior aimed at reducing both exchange rate and equity risk exposure.

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Bibliographic Reference

Hau, H and Rey, H. 2008. 'Global Portfolio Rebalancing Under the Microscope'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=6901