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Global Portfolio Rebalancing Under the Microscope

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  • Rey, Hélène
  • Hau, Harald

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.

Suggested Citation

  • Rey, Hélène & Hau, Harald, 2008. "Global Portfolio Rebalancing Under the Microscope," CEPR Discussion Papers 6901, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:6901
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    1. Pierre-Olivier Gourinchas & Hélène Rey, 2007. "International Financial Adjustment," Journal of Political Economy, University of Chicago Press, vol. 115(4), pages 665-703, August.
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    More about this item

    Keywords

    Capital flows; Home bias; International finance;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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