Evidence of Uncovered Equity Parity and International Portfolio Rebalancing in New Zealand

Abstract

Following the work of Curcuru, Thomas, Warnock, & Wongswan (2014); I examine the existence of Uncovered Equity Parity (UEP) in New Zealand using New Zealand funds’ portfolio holdings data of 12 countries over the period 01/2008 to 03/2018. The primary area of focus in my study is portfolio rebalancing behaviors in New Zealand investors. According to UEP, when foreign equity holdings out-perform local holdings, the domestic investors will reallocate some foreign portfolios away from the winning markets to reduce their exchange rate risk exposures. Using different analysis, I find some evidences suggesting portfolio rebalancing in New Zealand funds. In general, the results indicate that the investors are selling winners and buying losers over the short-term horizon. This behavior links back to a mixture of past currency returns and equity returns movements suggesting exchange rate risk as a possible driver of their decisions which is a new finding. I find no evidence of mean reversion opportunities in currency returns and equity returns that could influence the funds’ behavior. While other studies with U.S. data have found that U.S. funds rebalance to pursue higher future returns, I find no evidence supporting this in New Zealand funds. On contrary, the data indicates that New Zealand funds tend to shift into equity markets that under-perform in the 6-month horizon. While my findings are supportive and consistent with UEP, it goes against some recent studies on this topic. It also suggests that New Zealand is worth included in more future studies within the finance literature.