Benchmarking and Currency Risk
INSEAD - Finance
Tsinghua University - PBC School of Finance; INSEAD - Finance
March 10, 2012
Journal of Financial and Quantitative Analysis (JFQA), Forthcoming
We show that the currency risk embedded in the benchmarks of international mutual funds negatively affects fund performance. More specifically, a high benchmark-implied currency risk induces funds to invest in markets with less volatile currencies, leading to a higher degree of currency concentration in portfolio holdings. This currency concentration, however, departs from the optimal equity allocation strategy across countries and reduces fund performance. We document that funds resorting to high currency concentrations underperform funds with low currency concentrations by as much as 1% to 2% per year.
Number of Pages in PDF File: 44
Keywords: mutual fund, currency risk, portfolio management
JEL Classification: G23, G30, G32
Date posted: March 15, 2012 ; Last revised: October 31, 2014
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