Optimal Passive Currency Holdings: Equilibrium Currency Hedging Revisited

33 Pages Posted: 1 Jun 2010 Last revised: 27 Feb 2011

See all articles by Ian A. Cooper

Ian A. Cooper

London Business School

Andrey Kuzmenko

affiliation not provided to SSRN

Date Written: May 1, 2010

Abstract

We derive the optimal currency portfolio of an equity investor with no forecasting ability. This can be estimated based on observable parameters, including equity and currency covariances and the proportion of the investor's wealth held in risky assets. The currency position depends on the regression of a measure of home bias on currency returns and a measure of the relationship between currencies and inflation. This strategy differs significantly from commonly advocated currency strategies. In particular, for a typical US investor using data for the period 1900-2005 it should have been long foreign currencies. That would have resulted in a significantly improved Sharpe ratio.

Keywords: Currency Hedging, Equilibrium, Passive Management, Equity Portfolios, International Portfolios

JEL Classification: F30, F31, G11, G15

Suggested Citation

Cooper, Ian Anthony and Kuzmenko, Andrey, Optimal Passive Currency Holdings: Equilibrium Currency Hedging Revisited (May 1, 2010). Available at SSRN: https://ssrn.com/abstract=1618801 or http://dx.doi.org/10.2139/ssrn.1618801

Ian Anthony Cooper (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
+44 171 262 5050 (Phone)

Andrey Kuzmenko

affiliation not provided to SSRN

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
224
Abstract Views
1,328
rank
149,489
PlumX Metrics