Currency Hedging for International Portfolios

Glen, Jack; Jorion, Philippe

doi:10.1111/j.1540-6261.1993.tb05131.x

“…25 These findings are broadly in line with Glen and Jorion (1993) who do not find any significant performance improvement for international stock portfolios from FX excess returns.…”

Section: B Mean-variance Efficiency Testssupporting

confidence: 80%

International Diversification Benefits with Foreign Exchange Investment Styles

Kroencke

¹

,

Schindler

²

,

Schrimpf

³

2011

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Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp11028.pdf Abstract This paper provides a comprehensive analysis of portfolio choice with popular foreign exchange (FX) investment styles such as carry trades and strategies commonly known as FX momentum, and FX value. We investigate if diversification benefits can be achieved by style investing in FX markets relative to a benchmark allocation consisting of U.S. bonds, U.S. stocks, and international stocks. Overall, our results suggest that there are significant improvements in international portfolio diversification due to style-based investing in FX markets (both in the statistical, and most importantly, in the economic sense). These results prevail for the most important investment styles after accounting for transaction costs due to re-balancing of currency positions, and also hold in out-of-sample tests. Moreover, these gains do not only apply to a mean-variance investor but we also show that international portfolios augmented by FX investment styles are superior in terms of second and third order stochastic dominance. Thus, even an investor who dislikes negatively skewed return distributions would prefer a portfolio augmented by FX investment styles compared to the benchmark. Non-technical SummaryJEL-Classification: G11, G12, G15

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“…Glen and Jorion (1993), as well as de Roon, Nijman, and Werker (2003), do not find (significant) diversification benefits of simple currency positions that go beyond fully hedging the currency risk exposure of stock and bond portfolios. Campbell, de Medeiros, and Viceira (2010) report higher Sharpe ratios for fully hedged and optimally hedged portfolios than for unhedged portfolios.…”

Section: Related Literaturementioning

confidence: 99%

“…Notwithstanding, several studies carefully consider the exchange rate component in foreign investments, such as Glen andJorion (1993), de Roon, Nijman, andWerker (2003), and most recently Campbell, de Medeiros, and Viceira (2010). However, these studies consider the role of single currency positions and their role for international portfolios.…”

Section: Related Literaturementioning

confidence: 99%

“…However, it is possible to counteract the foreign exchange rate risk by an arbitrary hedging strategy. The hedged return R h;j t+1 can be written as 20 Glen and Jorion (1993), de Santis and Gerard (1997), Britten-Jones (1999), de Roon, Nijman, and Werker (2003), Kan and Zhou (2008), Eun, Lai, de Roon, and Zhang (2010), among others, cover similar assets and international markets.…”

Section: Data and Portfolio Constructionmentioning

confidence: 99%

See 1 more Smart Citation

International Diversification Benefits with Foreign Exchange Investment Styles*

Kroencke

¹

,

Schindler

²

,

Schrimpf

³

2013

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Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp11028.pdf Abstract This paper provides a comprehensive analysis of portfolio choice with popular foreign exchange (FX) investment styles such as carry trades and strategies commonly known as FX momentum, and FX value. We investigate if diversification benefits can be achieved by style investing in FX markets relative to a benchmark allocation consisting of U.S. bonds, U.S. stocks, and international stocks. Overall, our results suggest that there are significant improvements in international portfolio diversification due to style-based investing in FX markets (both in the statistical, and most importantly, in the economic sense). These results prevail for the most important investment styles after accounting for transaction costs due to re-balancing of currency positions, and also hold in out-of-sample tests. Moreover, these gains do not only apply to a mean-variance investor but we also show that international portfolios augmented by FX investment styles are superior in terms of second and third order stochastic dominance. Thus, even an investor who dislikes negatively skewed return distributions would prefer a portfolio augmented by FX investment styles compared to the benchmark. Non-technical SummaryJEL-Classification: G11, G12, G15

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“…Ibbotson, Siegel and Love, 1985), to optimal international asset allocation (see e.g. Glen and Jorion 1993;Odier and Solnik, 1993), to international asset pricing with extended CAPM (see e.g. Black, 1974;Stapleton and Subrahmanyam, 1977;Errunza and Losq, 1985;Eun and Janakiramanan, 1986;Hietala, 1989), to home country preference bias (see e.g.…”

Section: Introductionmentioning

confidence: 99%

Routes to equity market integration — the interplay between politicians, investors and managers

Oxelheim

¹

2001

Journal of Multinational Financial Management

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractMost econometric studies of equity market integration suggest that national markets are increasingly becoming part of a global equity market. As regards the extent of this integration, however, the results are often inconclusive. Further analysis calls for a closer scrutiny of the basic requirements for perfect integration.This paper presents an analysis of market segmentation in terms of existing regulatory and informational wedges, based on conditions in the Nordic welfare states. It is found that no barriers remain to cross-border equity market transactions, nor consequently to the perfect global integration of Nordic equity markets in a capital-flow perspective. However, certain residual cross-border tax wedges do challenge the view of perfect equity market integration. Further, continuing cross-border information gaps for small and medium-sized companies indicate the presence of a two-tier equity market integration.JEL classification: F30, F36, G15, G18, G38.

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Currency Hedging for International Portfolios

Cited by 229 publications

References 26 publications

International Diversification Benefits with Foreign Exchange Investment Styles

International Diversification Benefits with Foreign Exchange Investment Styles

International Diversification Benefits with Foreign Exchange Investment Styles*

Routes to equity market integration — the interplay between politicians, investors and managers

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