Exchange Rate Uncertainty and International Portfolio Flows

36 Pages Posted: 14 May 2013 Last revised: 29 Oct 2014

See all articles by Guglielmo Maria Caporale

Guglielmo Maria Caporale

Brunel University London - Department of Economics and Finance; London South Bank University; CESifo (Center for Economic Studies and Ifo Institute); German Institute for Economic Research (DIW Berlin)

Faek Menla Ali

University of Sussex -University of Sussex Business School

Nicola Spagnolo

Brunel University London - Economics and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: July 2014

Abstract

This paper examines the impact of exchange rate uncertainty on different components of portfolio flows, namely equity and bond flows, as well as the dynamic linkages between exchange rate volatility and the variability of these two types of flows. Specifically, a bivariate GARCH-BEKK-in-mean model is estimated using bilateral data for the US vis-à-vis Australia, the UK, Japan, Canada, the euro area, and Sweden over the period 1988:01-2011:12. The results indicate that the effect of exchange rate uncertainty on equity flows is negative in the euro area, the UK and Sweden, and positive in Australia, whilst it is negative in all countries except Canada (where it is positive) in the case of bond flows. Under the assumption of risk aversion, this suggests that exchange rate uncertainty induces a home bias and causes investors to reduce their financing activities to maximise returns and minimise exposure to uncertainty. Furthermore, since exchange rate volatility and the variability of flows are interlinked, exchange rate or credit controls on these flows can be used to pursue economic and financial stability.

Keywords: Exchange rate uncertainty, Equity flows, Bond flows, Causality-in-variance

JEL Classification: F31, F32, G15

Suggested Citation

Caporale, Guglielmo Maria and Menla Ali, Faek and Spagnolo, Nicola, Exchange Rate Uncertainty and International Portfolio Flows (July 2014). DIW Berlin Discussion Paper No. 1296. Available at SSRN: https://ssrn.com/abstract=2264178 or http://dx.doi.org/10.2139/ssrn.2264178

Guglielmo Maria Caporale (Contact Author)

Brunel University London - Department of Economics and Finance ( email )

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HOME PAGE: http://www.brunel.ac.uk/about/acad/bbs/bbsstaff/ef_staff/guglielmocaporale/

London South Bank University ( email )

Centre for Monetary and Financial Economics
London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstra├če 58
Berlin, 10117
Germany

Faek Menla Ali

University of Sussex -University of Sussex Business School ( email )

Falmer
Brighton, East Sussex BN1 9SL
United Kingdom

Nicola Spagnolo

Brunel University London - Economics and Finance ( email )

Uxbridge UB8 3PH
United Kingdom

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