Portfolio Rebalancing in Times of Stress

44 Pages Posted: 11 Feb 2021

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

Sylvia Kaufmann

Independent

Multiple version iconThere are 2 versions of this paper

Date Written: February 1, 2021

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 Markov regime-switching model into the structural VAR. The model is estimated using monthly data from 1995 to 2018, on equity returns, exchange rate returns, and equity flows between the United States and advanced and emerging market economies. We find that the data favor a two-state model where coefficients and shock volatilities switch jointly. In the VAR for flows between the United States and emerging market economies, the estimated states match periods of low and high financial stress, both in terms of the timing of regime switching and in terms of their volatility characteristics. Our main result is that for equity flows between the United States and emerging markets 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 rates and stock prices is smaller than in normal (low-stress) periods.

JEL Classification: F30, G11, G15

Suggested Citation

Fischer, Andreas M. and Greminger, Rafael and Grisse, Christian and Kaufmann, Sylvia, Portfolio Rebalancing in Times of Stress (February 1, 2021). CEPR Discussion Paper No. DP15777, Available at SSRN: https://ssrn.com/abstract=3784003

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 ( email )

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

Christian Grisse

Swiss National Bank ( email )

Research
Fraumuensterstr. 8
Zuerich, 8022
Switzerland

Sylvia Kaufmann

Independent

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