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

Date Written: June 28, 2019


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, Global Currency Hedging with Common Risk Factors (June 28, 2019). Available at SSRN: or

Wei Opie

Deakin University - Deakin Business School ( email )

221 Burwood Highway
Melbourne, Victoria 3125

Steven Riddiough (Contact Author)

University of Toronto ( email )

105 St George Street
Toronto, Ontario M5S 3G8

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
PlumX Metrics