Can Time-Varying Currency Risk Hedging Explain Exchange Rates?

67 Pages Posted: 12 Oct 2022 Last revised: 19 Sep 2023

See all articles by Leonie Bräuer

Leonie Bräuer

University of Geneva; Swiss Finance Institute, Students

Harald Hau

University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: October 10, 2022

Abstract

The rise in net international bond positions of non-US investors over the last decade can account for the long-run surge in net dollar hedging positions in FX derivatives. The latter influence spot exchange rates through CIP arbitrage. Using intermediaries’ capital ratio as a supply shifter, we identify a price inelastic derivative demand by institutional investors and document that changes in their net hedging positions can explain approximately 30% of all monthly variation in the seven most important dollar exchange rates from 2012 to 2022.

Keywords: Exchange Rate, Hedging Channel, Institutional Investors

JEL Classification: E44, F31, F32, G11, G15, G23

Suggested Citation

Bräuer, Leonie and Hau, Harald, Can Time-Varying Currency Risk Hedging Explain Exchange Rates? (October 10, 2022). Swiss Finance Institute Research Paper No. 22-77, Available at SSRN: https://ssrn.com/abstract=4245778 or http://dx.doi.org/10.2139/ssrn.4245778

Leonie Bräuer

University of Geneva ( email )

102 Bd Carl-Vogt
Genève, CH - 1205
Switzerland

Swiss Finance Institute, Students ( email )

c/o University of Geneva
42, Bd du Pont d'Arve
Geneva, CH-1211
Switzerland

Harald Hau (Contact Author)

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, Geneva 1211
Switzerland

Swiss Finance Institute

Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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