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Do international equity investors rebalance to manage currency exposure? A study of Greece foreign investor flows data

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  • Ülkü, Numan
  • Karpova, Yekaterina

Abstract

Hau and Rey (2006) explain a surprising negative correlation between the stock market and home currency by rebalancing action taken by unhedged international equity investors. Foreign investor flows data from Greece with a nationality-breakdown permit a unique empirical test of the key underlying assumption of their model setup: if rebalancing is driven by the motive of managing currency risk, only non-Eurozone investors should display such rebalancing behavior. Our results do not support this implication of the risk rebalancing hypothesis. We also study the trading behavior and information content of investors from different countries. An interesting finding from this analysis is that investors from Cyprus, island republics (tax havens) and Switzerland behave like domestic investors.

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  • Ülkü, Numan & Karpova, Yekaterina, 2014. "Do international equity investors rebalance to manage currency exposure? A study of Greece foreign investor flows data," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 150-169.
    • Handle: RePEc:eee:intfin:v:29:y:2014:i:c:p:150-169
    DOI: 10.1016/j.intfin.2013.12.005
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    Cited by:

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    3. Dongwon Lee & Kyungkeun Kim, 2016. "Global Risk and International Equity Portfolio Rebalancing," Working Papers 201605, University of California at Riverside, Department of Economics.
    4. Ülkü, Numan & Fatullayev, Sabutay & Diachenko, Daria, 2016. "Can risk-rebalancing explain the negative correlation between stock return differential and currency? Or, does source status drive it?," Journal of Financial Markets, Elsevier, vol. 27(C), pages 28-54.

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    More about this item

    Keywords

    International equity portfolio flows; Unhedged currency exposure; Risk rebalancing hypothesis; Stock market–exchange rate correlation; Feedback trading;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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