Global Currency Hedging with Common Risk Factors

44 Pages Posted: 2 Nov 2018 Last revised: 16 Nov 2018

See all articles by Wei Opie

Wei Opie

Deakin University - Deakin Business School

Steven J. Riddiough

University of Melbourne

Date Written: November 15, 2018

Abstract

We propose a novel method for dynamically hedging foreign exchange exposure in international equity and bond portfolios. The method exploits time-series predictability in currency returns that we find emerges from a forecastable component in currency factor returns. The hedging strategy outperforms leading alternative approaches out-of-sample across a large set of performance metrics. Moreover, we find that exploiting the predictability of currency returns 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

JEL Classification: F31, G11, G15

Suggested Citation

Opie, Wei and Riddiough, Steven J., Global Currency Hedging with Common Risk Factors (November 15, 2018). 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 J. Riddiough (Contact Author)

University of Melbourne ( email )

Faculty of Business and Economics
Level 12 198 Berkeley Street
Melbourne, Victoria 3010
Australia
+61 (0)3834 40044 (Phone)

HOME PAGE: http://www.stevenriddiough.com

Register to save articles to
your library

Register

Paper statistics

Downloads
62
rank
335,072
Abstract Views
275
PlumX Metrics