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

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, 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 ( email )

105 St George Street
Toronto, Ontario M5S 3G8
Canada

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

Paper statistics

Downloads
699
Abstract Views
2,608
Rank
68,910
PlumX Metrics