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

Interdisciplinary Center (IDC) Herzliyah; AQR Capital Management, LLC

Matthew P. Richardson

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); AQR Capital Management, LLC

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)

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Matthew P. Richardson

New York University (NYU) - Department of Finance ( email )

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

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

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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