Optimal Currency Hedging for International Equity Portfolios

Financial Analyst Journal - Forthcoming

30 Pages Posted: 16 Oct 2018 Last revised: 8 Jun 2019

See all articles by Jacob Boudoukh

Jacob Boudoukh

Reichman University - Interdisciplinary Center (IDC) Herzliyah

Matthew P. Richardson

Department of Finance, Leonard N. Stern School of Business, New York University

Ashwin K Thapar

AQR Capital Management, LLC

Franklin Wang

AQR Capital Management, LLC

Date Written: June 6, 2019

Abstract

We explore optimal currency exposures in international equity portfolios through the lens of a modified mean-variance optimization framework. We decompose the optimal currency portfolio into a “hedge portfolio” which minimizes equity volatility using a dynamic risk model and an “alpha seeking portfolio” based on the well-documented currency styles of value, momentum and carry. This is an integrated and economically intuitive approach to currency management that simultaneously provides lower risk and higher returns compared to both hedged and unhedged benchmarks. Crucially, the solution is practical with realistic and implementable leverage, turnover and tail risk characteristics.

Keywords: International equity portfolio, Currency risk, Optimal hedging, Carry, Value, Momentum

JEL Classification: G12, G15

Suggested Citation

Boudoukh, Jacob and Richardson, Matthew P. and Thapar, Ashwin K and Wang, Franklin, Optimal Currency Hedging for International Equity Portfolios (June 6, 2019). Financial Analyst Journal - Forthcoming, Available at SSRN: https://ssrn.com/abstract=3265403 or http://dx.doi.org/10.2139/ssrn.3265403

Jacob Boudoukh (Contact Author)

Reichman University - Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 4610101
Israel

Matthew P. Richardson

Department of Finance, Leonard N. Stern School of Business, New York University ( email )

44 West 4th Street
Suite 9-190
New York, NY 10012-1126
United States
+1 (212) 998-0349 (Phone)
212-995-4233 (Fax)

Ashwin K Thapar

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Franklin Wang

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

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