Internationally Diversified Bond Portfolios: The Merits of Active Currency Risk Management

37 Pages Posted: 27 Apr 2000 Last revised: 14 Apr 2008

See all articles by Richard M. Levich

Richard M. Levich

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Lee R. Thomas

Investcorp - London Office

Date Written: April 1993

Abstract

A new statistical procedure is used to test for weak form efficiency in the foreign exchange futures markets. Using daily currency futures prices for the 1976-1990 period, we conclude that successive exchange rate changes have not been independent We examine the implications of this finding for two groups of investors: (1) return seeking investors considering foreign exchange as a separate asset class; (2) international portfolio investors deciding whether or not to currency hedge the foreign exchange rate exposures embedded in their non-dollar investments. Using the currency futures data and monthly data on 10-year dollar and non-dollar bonds, we conclude that active currency risk management, based on a simple application of technical trading signals, can substantially improve the risk-return opportunities for both groups of investors in comparison to passive currency strategies.

Suggested Citation

Levich, Richard M. and Thomas, Lee R., Internationally Diversified Bond Portfolios: The Merits of Active Currency Risk Management (April 1993). NBER Working Paper No. w4340. Available at SSRN: https://ssrn.com/abstract=227035

Richard M. Levich (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0422 (Phone)
212-995-4256 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Lee R. Thomas

Investcorp - London Office

48 Grosvenor Street
London W1K 3HW
United Kingdom

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