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Global currency hedging with common risk factors
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.
History
Journal
Journal of financial economicsVolume
136Issue
3Pagination
780 - 805Publisher
ElsevierLocation
Amsterdam, The NetherlandsPublisher DOI
ISSN
0304-405XLanguage
engPublication classification
C1 Refereed article in a scholarly journal; C Journal articleUsage metrics
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No categories selectedKeywords
Global currency hedgingCurrency risk factorsCurrency returnsInternational portfolio diversificationMean-variance optimizationSocial SciencesBusiness, FinanceEconomicsBusiness & EconomicsEXCHANGE-RATESCARRY TRADEINTERNATIONAL DIVERSIFICATIONEXTERNAL WEALTHFOREIGN-ASSETSRETURNSPERFORMANCETIMEPREDICTABILITYLIABILITIESmean-variance optimization.
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