Global Portfolio Rebalancing and Exchange Rates

Abstract We examine international equity allocations at the fund level and show how excess foreign returns influence portfolio rebalancing, capital flows, currencies. Our equilibrium model of incomplete exchange (FX) risk trading where rate partially segments markets is consistent with observed dynamics returns, rates, fund-level flows. document that rebalancing more intense under higher FX volatility find heterogeneous behavior across different characteristics. A granular instrumental variable approach identifies a positive currency supply elasticity. Authors have furnished an Internet Appendix, which available on Oxford University Press Web site next to link final published paper online.