Exchange rate fluctuations and international portfolio rebalancing |
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| Institution: | 1. Bank for International Settlements, Switzerland;2. Swiss National Bank, Switzerland;3. Bank of Thailand, Thailand;1. College of Business & Economics, UAE University, Al Ain, United Arab Emirates;2. College of Business Administration, King Saud University, Riyadh, KSA;1. Department of Finance, New Jersey City University, USA;2. Strathclyde Business, School Accounting and Finance, 199 Cathedral Street, Glasgow G4 0QU, United Kingdom;1. Departamento de Lenguajes y Ciencias de la Computación, Universidad de Málaga, Málaga, Spain;2. Departamento de Informática, Universidad Carlos III de Madrid, Leganés, Madrid, Spain |
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| Abstract: | We present empirical evidence for several hypotheses of how exchange rates are affected by investors' cross-border equity portfolio rebalancing decisions. Our results are based on comprehensive, daily-frequency datasets of foreign exchange market transactions and equity market capital flows undertaken by nonresident investors in Thailand in 2005 and 2006. We find that net purchases of Thai equities by nonresident investors systematically lead to an appreciation of the Thai baht. Furthermore, higher returns on Thai equities relative to those on a reference market are associated with subsequent sales of Thai equities by foreign investors as well as a depreciation of the Thai baht, although the latter effect is not statistically significant. |
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