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Dynamic currency hedging for international stock portfolios

Opie, Wei, Brown, Christine and Dark, Jonathan 2012, Dynamic currency hedging for international stock portfolios, Review of futures markets, vol. 20, no. 4, pp. 419-455.

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Title Dynamic currency hedging for international stock portfolios
Author(s) Opie, Wei
Brown, Christine
Dark, Jonathan
Journal name Review of futures markets
Volume number 20
Issue number 4
Start page 419
End page 455
Total pages 37
Publisher Chicago Board of Trade
Place of publication Chicago, Ill.
Publication date 2012
ISSN 0898-011X
Keyword(s) dynamic hedging
currency risk
conditional correlation
Summary The paper studies dynamic currency risk hedging of international stock portfolios using a currency overlay. A dynamic conditional correlation (DCC) multivariate GARCH model is employed to estimate time-varying covariance among stock market returns and currency returns. The conditional covariance is then used in the estimation of risk-minimizing conditional hedge ratios. The study considers seven developed economies over the period January 2002 to April 2010 and estimates daily conditional hedge ratios for portfolios of various stock market combinations. Conditional hedging is shown to dominate traditional static hedging and unconditional hedging in terms of risk reduction both in-sample and out-of-sample, especially during the recent global financial crisis. Conditional hedging also proves to consistently reduce portfolio risk for various levels of foreign investments.
Language eng
Field of Research 150205 Investment and Risk Management
Socio Economic Objective 900102 Investment Services (excl. Superannuation)
HERDC Research category C1 Refereed article in a scholarly journal
Persistent URL http://hdl.handle.net/10536/DRO/DU:30050799

Document type: Journal Article
Collection: School of Accounting, Economics and Finance
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