Global Currency Hedging with Common Risk Factors

62 Pages Posted: 2 Nov 2018 Last revised: 30 Jun 2019

See all articles by Wei Opie

Wei Opie

Deakin University - Deakin Business School

Steven Riddiough

University of Toronto - Rotman School of Management; University of Toronto at Scarborough - Division of Management

Date Written: June 28, 2019

Abstract

We develop a novel method to dynamically hedge foreign exchange exposure in international equity and bond portfolios. The method exploits the time-series predictability of currency returns, which we show emerges from exploiting a forecastable component in global factor returns. The hedging strategy outperforms leading alternative approaches to currency hedging across a large set of out-of-sample performance metrics. Moreover, we find that exploiting currency return predictability via an independent currency portfolio delivers a high risk-adjusted return and provides superior diversification gains to global equity and bond investors relative to currency carry, value, and momentum investment strategies.

Keywords: global currency hedging, currency risk factors, currency returns, international portfolio diversification, mean-variance optimization.

JEL Classification: F31, G11, G15.

Suggested Citation

Opie, Wei and Riddiough, Steven and Riddiough, Steven, Global Currency Hedging with Common Risk Factors (June 28, 2019). Available at SSRN: https://ssrn.com/abstract=3264531 or http://dx.doi.org/10.2139/ssrn.3264531

Wei Opie

Deakin University - Deakin Business School ( email )

221 Burwood Highway
Burwood
Melbourne, Victoria 3125
Australia

Steven Riddiough (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

University of Toronto at Scarborough - Division of Management ( email )

1265 Military Trial
Scarborough, Ontario M1C 1A4
Canada

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