Currency Risk and Equity Allocations by International Mutual Funds
25 Pages Posted: 14 Nov 2018
Date Written: November 2, 2018
Abstract
We show that international equity mutual funds underweight equity markets with risky currencies and overweight equity markets with less risky ones. This risk-management practice is an important determinant for allocations among foreign equities and can also help explain levels of home bias for individual funds. On average, this leads to a reduction of fund volatility but puts a constraint on stock-picking and performance. Our findings stress the importance of currency risk in explaining equity allocations by professional asset managers around the world.
Keywords: International Mutual Funds, Currency Risk, Equity Allocation
JEL Classification: F21, G14, G15, G23
Suggested Citation: Suggested Citation