Global Currency Hedging with Common Risk Factors

62 Pages Posted: 2 Nov 2018 Last revised: 10 May 2019

See all articles by Wei Opie

Wei Opie

Deakin University - Deakin Business School

Steven J. Riddiough

University of Melbourne

Date Written: May 7, 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

JEL Classification: F31, G11, G15

Suggested Citation

Opie, Wei and Riddiough, Steven J., Global Currency Hedging with Common Risk Factors (May 7, 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 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
144
rank
197,590
Abstract Views
570
PlumX Metrics