Do international equity investors rebalance to manage currency exposure? A study of Greece foreign investor flows data

Hau and Rey (2006) explain a surprising negative correlation between the stock market and home currency by rebalancing action taken by unhedged international equity investors. Foreign investor flows data from Greece with a nationality-breakdown permit a unique empirical test of the key underlying assumption of their model setup: if rebalancing is driven by the motive of managing currency risk, only non-Eurozone investors should display such rebalancing behavior. Our results do not support this implication of the risk rebalancing hypothesis. We also study the trading behavior and information content of investors from different countries. An interesting finding from this analysis is that investors from Cyprus, island republics (tax havens) and Switzerland behave like domestic investors.