Investing in Emerging Stock Markets: Is it Worthwhile Hedging Foreign Exchange Risk?
6 Pages Posted: 4 Feb 2008 Last revised: 8 Oct 2013
Stock markets in emerging economies are often surrounded by a fast-pace real and monetary growth. The high returns typical of those markets continue to attract foreign investors who are looking to enhance the performance of their portfolios. A number of studies demonstrate the advantage of international diversification due to a comparatively low correlation between stock returns in developed and emerging markets, an advantage expressed in terms of risk-return tradeoff. In this study, we empirically examine the role of exchange rate risk in determining the benefits from international diversification. While a number of studies conclude that those benefits are enhanced by hedging the exchange rate risk, we find that such a hedge may decrease the gain from diversification between a developed market and a high-risk emerging one.
Keywords: international stock portfolio, hedging foreign exchange risk, international capital markets
JEL Classification: F21, F31, G11, G15
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