Safe-Haven Currencies as Defensive Assets in Global Stocks Portfolios: A Reassessment of the Empirical Evidence (1999–2022)

Abstract

This paper reassessed the hedging properties of four major safe-haven currencies (US dollar, Swiss franc, euro, yen) in international stock portfolios covering most representative world macroeconomic areas. The main contribution to the existing literature is the emphasis on optimal hedging and asset-allocation strategies. A further distinguishing feature is an accurate comparison, inside a multivariate framework, between value-at-risk simulations assuming equal or optimal asset weights in hedged global stock portfolios. The US dollar stands out as the best safe-haven currency, while adding the US currency to single-hedged global stock portfolios including either the Swiss franc or the euro yields smooth risk profiles during major financial crises, and average risk indicators lower than that of a benchmark fully hedged portfolio.

What Drives Asset Returns Comovements? Some Empirical Evidence from US Dollar and Global Stock Returns (2000–2023)

“…Dynamic Conditional Correlations between US Dollar returns and aggregate stock market returns are obtained from Tronzano (2023). This paper documents that, when compared with other safe-haven currencies (Swiss Franc, Euro, Yen), the US Dollar stands out as the best defensive instrument in hedged global stock portfolios.…”

“…Since preliminary data inspection carried out in Tronzano (2023) documents Arch effects and significant serial correlation in return series, Equation (1) is estimated using the Newey and West (1987) heteroscedasticity and autocorrelation consistent estimator of the covariance matrix.…”

“…3 All asset prices data are obtained from Thomson Reuters-Datastream. See Tronzano (2023), sct.3, for details about these series and relative Thomson Reuters codes. See also Appendix A.…”

“…The emphasis on the US currency, moreover, is motivated by a large empirical evidence documenting that this currency stands out as one of the most effective hedging instruments in global stock portfolios (see Campbell et al 2010and, more recently, Chan et al 2018Dong et al 2021;Lilley et al 2022;Tronzano 2023).…”