Currency Hedging for International Portfolios

Schmittmann, Jochen M.

doi:10.5089/9781455201341.001

Cited by 33 publications

(24 citation statements)

References 33 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Some studies have analyzed hedging strategies that go beyond simple rule-ofthumb guides. In particular, Glen & Jorion (1993), de Roon, Nijman & Werker (2003), Campbell, de Medeiros & Viceira (2010), Schmittmann (2010), Kroencke, Schindler & Schrimpf (2014), and Opie & Dark (2015) analyze diversification benefits from optimal hedging strategies based on the theory originally proposed by Anderson & Danthine (1981), albeit with mixed empirical results. 2 Whereas they all reject leaving international investments unhedged, the first two studies find no significant evidence that a static optimal hedging strategy provides diversification benefits beyond what can be achieved by fully hedging international equity investments.…”

Section: Most Of the Aforementioned Studies Neglect An Important Compmentioning

confidence: 99%

Dynamic Global Currency Hedging

Christensen

Varneskov

2016

SSRN Journal

View full text Add to dashboard Cite

This paper proposes a model for discrete-time hedging based on continuous-time movements in portfolio and foreign currency exchange rate returns. In particular, the vector of optimal currency exposures is shown to be given by the negative realized regression coefficients from a one-period conditional expectation of the intra-period quadratic covariation matrix for portfolio and foreign exchange rate returns. These are labelled the realized currency betas. The model, hence, facilitates dynamic hedging strategies that depend exclusively on the dynamic evolution of the ex-post quadratic covariation matrix. These hedging strategies are suggested implemented using modern, yet simple, non-parametric techniques to accurately measure and dynamically model historical quadratic covariation matrices. The empirical results from an extensive hedging exercise for equity investments illustrate that the realized currency betas exhibit important time variation, leading to substantial economic, as well as statistically significant, volatility reductions from the proposed hedging strategies, compared to existing benchmarks, without sacrificing returns. As a result, a risk-averse investor is shown to be willing to pay several hundred basis points to switch from existing hedging methods to the proposed realized currency beta approach. Interestingly, the empirical analysis strongly suggests that the superior performance of the latter during the most recent global financial crisis of 2008 is, at least partially, funded by carry traders.

show abstract

Section: Most Of the Aforementioned Studies Neglect An Important Compmentioning

confidence: 99%

Dynamic Global Currency Hedging

Christensen

Varneskov

2016

SSRN Journal

View full text Add to dashboard Cite

show abstract

“…On the other hand, hedging for the purpose of risk minimization mitigates estimation risk, as the covariance structure is found to be estimated with higher precision. Schmittmann (2010) analyzed constant hedging strategies in comparison to the static variance minimizing hedging ratios calculated with ordinary least squares, while De Roon, Eiling, Gerard, and Hillion (2011) included currency positions as a further asset class and pointed out that risk hedging and speculative benefits are two motivations for internationally diversified portfolios. Overall, the studies provide supporting evidence showing that currency hedging reduces risk in multi-currency portfolios.…”

Section: Literature Reviewmentioning

confidence: 99%

Ambiguity and the Home Currency Bias

Ulrych

Vasiljević

2020

SSRN Journal

View full text Add to dashboard Cite

This paper addresses the question of optimal currency exposure for a risk-and-ambiguity-averse international investor. A robust mean-variance model with smooth ambiguity preferences is used to derive the optimal currency exposure. In the theoretical part, we show that the sample-efficient currency demand can be calculated as the solution to a generalized ridge regression. Through the lens of these results, we demonstrate that our ambiguity-based model offers a new explanation of the home currency bias. The investor's dislike for model uncertainty induces a disproportionately high currency hedging demand. The empirical analysis of currency overlay strategies employs the foreign exchange, equity, and bond returns over the period from 1999 to 2018. Our out-of-sample back-tests illustrate that accounting for ambiguity enhances the stability of estimated optimal currency exposures and significantly improves the portfolio performance net of transaction costs.

show abstract

Section: Introductionmentioning

confidence: 99%

Dynamic Global Currency Hedging

Christensen

Varneskov

2021

Journal of Financial Econometrics

View full text Add to dashboard Cite

This article proposes a model for discrete-time currency hedging based on continuous-time movements in portfolio and foreign exchange rate returns. The vector of optimal currency exposures is given by the negative realized regression coefficients from a one-period conditional expectation of the intraperiod quadratic covariation matrix for portfolio and exchange rate returns. Empirical results from an extensive hedging exercise for equity investments illustrate that currency exposures exhibit important time variation, leading to substantial volatility reductions when hedging, without sacrificing returns. A risk-averse investor is willing to pay several hundred annual basis points to switch from existing hedging methods to the proposed dynamic strategies.

show abstract

Currency Hedging for International Portfolios

Cited by 33 publications

References 33 publications

Dynamic Global Currency Hedging

Dynamic Global Currency Hedging

Ambiguity and the Home Currency Bias

Dynamic Global Currency Hedging

Contact Info

Product

Resources

About