Portfolio Rebalancing in Times of Stress

35 Pages Posted: 24 Jul 2017

See all articles by Andreas M. Fischer

Andreas M. Fischer

Swiss National Bank; Centre for Economic Policy Research (CEPR)

Rafael Greminger

Tilburg University

Christian Grisse

Swiss National Bank

Multiple version iconThere are 2 versions of this paper

Date Written: 2017-07-01

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.

JEL Classification: F30, G11, G15

Suggested Citation

Fischer, Andreas M. and Greminger, Rafael and Grisse, Christian, Portfolio Rebalancing in Times of Stress (2017-07-01). Globalization and Monetary Policy Institute Working Paper No. 322, Available at SSRN: https://ssrn.com/abstract=3006525 or http://dx.doi.org/10.24149/gwp322

Andreas M. Fischer (Contact Author)

Swiss National Bank ( email )

Borsenstrasse 15
CH-8022 Zurich
Switzerland
+41 1 631 3294 (Phone)
+41 1 631 3901 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Rafael Greminger

Tilburg University

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

Christian Grisse

Swiss National Bank ( email )

Research
Fraumuensterstr. 8
Zuerich, 8022
Switzerland

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
34
Abstract Views
313
PlumX Metrics