Currency Hedging for International Stock Portfolios

39 Pages Posted: 20 Jan 2003

See all articles by Frans de Roon

Frans de Roon

Tilburg University - Department of Finance

Theo Nijman

Tilburg University - Center and Faculty of Economics and Business Administration

Bas J. M. Werker

Tilburg University - Center for Economic Research (CentER)

Date Written: 24 2000 5,

Abstract

This paper tests whether hedging currency risk improves the performance of international stock portfolios. We use a generalized performance measure which allows for investor-dependencies such as different utility functions and the presence of nontraded risks. In addition we show that an auxiliary regression, similar to the Jensen regression, provides a wealth of information about the optimal portfolio holdings for investors for the non mean-variance case. This is analogous to the information provided by the Jensen regression about optimal portfolio holdings for the mean-variance case. Our empirical results show that static hedging with currency forwards does not lead to improvements in portfolio performance for a US investor that holds a stock portfolio from the G5 countries. On the other hand, hedges that are conditional on the current interest rate spread do lead to significant performance improvements. Also, when an investor has a substantial exogenous exposure to one of the currencies, currency hedging clearly improves his portfolio performance. While these results hold for investors with power utility as well as with mean-variance utility functions, the optimal hedge ratios for these investors are different.

Keywords: currency risk, hedging, forwards, international asset pricing, portfolio choice

JEL Classification: M, G3, G31

Suggested Citation

de Roon, Frans A. and Nijman, Theo E. and Werker, Bas J.M., Currency Hedging for International Stock Portfolios (24 2000 5,). ERIM Report Series Reference No. ERS-2000-21-F&A. Available at SSRN: https://ssrn.com/abstract=370817

Frans A. De Roon (Contact Author)

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 1 3466 8361/3025 (Phone)
+31 1 3466 2875 (Fax)

Theo E. Nijman

Tilburg University - Center and Faculty of Economics and Business Administration ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2342 (Phone)
+31 13 466 3280 (Fax)

Bas J.M. Werker

Tilburg University - Center for Economic Research (CentER) ( email )

Econometrics and Finance Group
5000 LE Tilburg
Netherlands

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