Portfolio rebalancing in times of stress

This paper investigates time variation in the dynamics of international portfolio equity flows. We extend empirical model Hau and Rey (2004) by embedding a Markov regime-switching into structural VAR. The is estimated using monthly data from 1995 to 2018, on returns, exchange rate flows between United States advanced emerging market economies. find that favor two-state where coefficients shock volatilities switch jointly. In VAR for economies, states match periods low high financial stress, both terms timing regime switching their volatility characteristics. Our main result markets rebalancing differ episodes levels stress. A low- high-stress associated with capital outflows markets. Once regime, response rates stock prices smaller than normal (low-stress) periods.