International portfolio rebalancing and exchange rate fluctuations in Thailand

We present empirical evidence that the Thai exchange rate is driven in part by international investors' cross-border portfolio rebalancing decisions. Our results are based on two comprehensive, daily-frequency datasets of foreign exchange 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 lead to an appreciation of the Thai baht. In addition, higher returns in the Thai equity market relative to a reference stock market are associated both with net sales of Thai equities by these investors and with a depreciation of the Thai baht. Foreign investors do not appear to hedge the foreign exchange risk related to their equity market positions. Despite this, we find that exchange rate movements were not key drivers of nonresident investors' equity market investment choices in our sample period.