Dynamic Conditional Currency Hedging

51 Pages Posted: 17 Jul 2017

See all articles by Melk Bucher

Melk Bucher

Columbia Business School; University of St. Gallen - School of Finance

Date Written: July 9, 2017

Abstract

We propose a simple and dynamic approach to hedge currency risk which can directly be applied by international investors in diverse asset classes. Other than current mean-variance approaches it is robust to overfitting and can thus better anticipate optimal currency hedging for global equity, bond and commodity investors out-of-sample. Furthermore, we document that correlations between currencies, equities, and commodities vary over time and can be predicted by implied FX volatility. This allows investors to significantly reduce their risk compared to hedging alternatives without giving up on Sharpe ratio, particularly during crisis periods.

Keywords: currency hedging, mean-variance analysis, implied volatility, overfitting

JEL Classification: F31, G11, G15

Suggested Citation

Bucher, Melk, Dynamic Conditional Currency Hedging (July 9, 2017). Columbia Business School Research Paper No. 17-72. Available at SSRN: https://ssrn.com/abstract=2999463 or http://dx.doi.org/10.2139/ssrn.2999463

Melk Bucher (Contact Author)

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

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