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The impact of the exchange rate on Luxembourg equity funds

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  • Mustafa Kultur
  • Romuald Morhs

Abstract

The aim of this work is to investigate the impact of the exchange rate on Luxembourg equity funds. For this purpose, the dataset compiled by the Banque centrale du Luxembourg is used to exploit the detailed information on the currency composition of assets and liabilities and to deliver a statistical decomposition of the exchange rate valuation effect on both sides of the balance sheet. In addition, an econometric analysis relying on the International Capital Asset Pricing Model (ICAPM) is carried out to estimate the sensitivity of the Net Asset Value (NAV) to exchange rate movements. The main findings of the study are the following. (i) Equity funds in Luxembourg are highly internationalized as for the currency composition of their balance sheet, with 54% of noneuro denominated shares on the liability side, and 81% of non-euro denominated securities on the asset side at the end of June 2013. (ii) The currency composition of Luxembourg equity funds has changed since the onset of the financial crisis, with relatively more USD-denominated shares on the liability side and relatively more emerging markets currency-denominated securities on the asset side. (iii) This structural change in the currency composition of Luxembourg equity funds delivered a higher sensitivity of the NAV to exchange rate movements, in particular with respect to the emerging markets currencies. (iv) Despite this increased sensitivity to the exchange rate, stock market developments remain the most important driver for the activity of Luxembourg equity funds in the medium run. From this point of view, the EUR/USD exchange rate provided a natural hedging against stock market fluctuations during the crisis period, thereby mitigating the aggregate evolution of the NAV expressed in euro.

Suggested Citation

  • Mustafa Kultur & Romuald Morhs, 2014. "The impact of the exchange rate on Luxembourg equity funds," BCL working papers 86, Central Bank of Luxembourg.
    • Handle: RePEc:bcl:bclwop:bclwp086
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    File URL: https://www.bcl.lu/fr/Recherche/publications/cahiers_etudes/86/BCLWP086.pdf
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    References listed on IDEAS

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    Cited by:

    1. Raphaël Janssen & Romuald Morhs, 2015. "The interest rate sensitivity of Luxembourg bond funds: results from a time-varying model," BCL working papers 98, Central Bank of Luxembourg.

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    More about this item

    Keywords

    Equity funds; risk analysis; ICAPM; fixed-effects model;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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