Currency Hedging Strategies, Strategic Benchmarks and the Global and Euro Sovereign Financial Crises

72 Pages Posted: 9 Oct 2013 Last revised: 23 Oct 2013

See all articles by Massimiliano Caporin

Massimiliano Caporin

University of Padova - Department of Statistical Sciences

Juan-Angel Jiménez-Martin

Complutense University of Madrid

Lydia González Serrano

Universidad Rey Juan Carlos

Date Written: October 8, 2013

Abstract

This paper investigates dynamic currency hedging benefits, with a further focus on the impact of currency hedging before and during the recent financial crises originated from the subprime and the Euro sovereign bonds. We take the point of view of a Euro-based institutional investor who considers passive investment strategies in portfolios holding European, British and US assets. We analyze the impact of the model specification to improve the risk-return tradeoff when currency risk is hedged. Hedging strategies of currency risk, using exchange rates futures and driven by several multivariate GARCH models, depend on the portfolio composition and period analyzed. Dynamic covariance models provide limited evidences of a decrease in hedging rations compared to naïve hedging strategies based on linear regressions or variance smoothing. Nevertheless, those results are coupled with better performances of dynamic covariance models in terms of hedging effectiveness an improved Sharpe ratios. The empirical evidences are observed both in-sample as well as in an out-of-sample exercise.

Keywords: Multivariate GARCH, conditional correlations, currency futures, optimal hedge ratios, hedging strategies.

JEL Classification: G11, G15, G17, G23, G32, G01, C32, C53, C58

Suggested Citation

Caporin, Massimiliano and Jiménez-Martin, Juan-Angel and González Serrano, Lydia, Currency Hedging Strategies, Strategic Benchmarks and the Global and Euro Sovereign Financial Crises (October 8, 2013). Available at SSRN: https://ssrn.com/abstract=2337637 or http://dx.doi.org/10.2139/ssrn.2337637

Massimiliano Caporin

University of Padova - Department of Statistical Sciences ( email )

Via Battisti, 241
Padova, 35121
Italy

Juan-Angel Jiménez-Martin (Contact Author)

Complutense University of Madrid ( email )

Complutense University of Madrid
Campus de somosaguas
Pozuelo de Alarcon, Madrid 28223
Spain
+34 91 3942355 (Phone)

HOME PAGE: http://www.ucm.es/fundamentos-analisis-economico2/jajm

Lydia González Serrano

Universidad Rey Juan Carlos ( email )

Calle Tulipán, s/n
Madrid, Móstoles 28032
Spain

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