Home About Latest Browse RSS Advanced Search

Federal Reserve Bank of Dallas
Globalization Institute Working Papers
Portfolio Rebalancing in Times of Stress
Andreas M. Fischer
Rafael Greminger
Christian Grisse
Abstract

This paper investigates time variation in the dynamics of international portfolio equity flows. We extend the empirical model of Hau and Rey (2004) by embedding a two-state Markov regime-switching model into the structural VAR. The model is estimated using monthly data, 1995-2015, on equity returns, exchange rate returns and equity flows between the United States and advanced and emerging economies. We find that the data are consistent with portfolio rebalancing. The estimated states match periods of low and high financial stress. Our main result is that for equity flows between the United States and emerging markets, the rebalancing dynamics differ between episodes of high and low levels of financial stress. A switch from the low to the high-stress regime is associated with capital outflows from emerging markets. Once in the high stress regime, the response of capital flows to exchange rate shocks is smaller than in normal (low stress) periods.


Download Full text
Cite this item
Andreas M. Fischer & Rafael Greminger & Christian Grisse, Portfolio Rebalancing in Times of Stress, Federal Reserve Bank of Dallas, Globalization Institute Working Papers 322, 01 Jul 2017.
More from this series
JEL Classification:
Subject headings:
DOI: 10.24149/gwp322
For corrections, contact Amy Chapman ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal