Version 2 2024-06-03, 20:10Version 2 2024-06-03, 20:10
Version 1 2020-01-07, 10:36Version 1 2020-01-07, 10:36
journal contribution
posted on 2024-06-03, 20:10authored byWei OpieWei Opie, SJ Riddiough
We develop a novel method to dynamically hedge foreign exchange exposure in international equity and bond portfolios. The method exploits the time-series predictability of currency returns, which we show emerges from exploiting a forecastable component in global factor returns. The hedging strategy outperforms leading alternative approaches to currency hedging across a large set of performance metrics. Moreover, we find that exploiting currency return predictability via an independent currency portfolio delivers a high risk-adjusted return and provides superior diversification gains to global equity and bond investors relative to currency carry, value, and momentum investment strategies.