The dynamics of institutions beliefs and portfolio choices

Advisor: Carlos Viana de Carvalho

Empirical studies of how actions respond to expectations are of increasing relevance, as they provide vital information on agents’ choices and contribute to theoretical models. We explore how this pass-through occurs in institutional investors in Brazil. We assemble a novel dataset by matching data on institutions’ forecasts of inflation, the exchange rate and the interest rate with their hedge funds portfolio holdings. This dataset allows us to investigate how institutional investors’ expectations are related to their portfolio choices. We document that increases in funds’ inflation and exchange rate expectations are correlated with decreases in their exposures to fixed rate bonds. We also observe a negative correlation between their expectation of the interest rate and their exposure to inflation bonds once we control for the other variables.