Template-type: ReDIF-Paper 1.0 Author-Name: Andreas M. Fischer Author-Name-First: Andreas M. Author-Name-Last: Fischer Author-Person: pfi23 Author-Name: Rafael Greminger Author-Name-First: Rafael Author-Name-Last: Greminger Author-Name: Dr. Christian Grisse Author-Name-First: Christian Author-Name-Last: Grisse Author-Person: pgr250 Title: Portfolio rebalancing in times of stress 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 for the period 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 high and low episodes 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. Length: 39 pages Creation-Date: 2017 Contact-Email: forschung@snb.ch File-URL: https://www.snb.ch/en/publications/research/working-papers/2017/working_paper_2017_11 File-Format: text/html Number: 2017-11 Classification-JEL: F30, G11, G15 Keywords: Portfolio rebalancing, equity flows, exchange rates, financial stress, structural VAR, sign restrictions, regime switching Handle: RePEc:snb:snbwpa:2017-11