Hedging Foreign Currency Exposure: Do Fat Tails Matter?

Posted: 20 Dec 1998

See all articles by Ronald Mahieu

Ronald Mahieu

Tilburg University - Center for Economic Research, Econometrics and Finance Group; TiasNimbas Business School

Kees C. G. Koedijk

Tilburg University - Department of Finance

Date Written: August 1994

Abstract

In this paper hedging foreign currency exposure is reconsidered. We investigate the sensitivity of hedge ratios for the well-documented existence of unconditional kurtosis in asset and exchange rate returns. We derive theoretical hedge ratios for fat-tailed asset return distributions and find that they, depending on the degree of relative risk aversion, can differ substantially from the minimum-variance case. The empirical results indicate, however, that there is no significant effect of the fat-tailed hedge ratios on the performance of the hedged portfolios. The performance of hedged portfolios is not very sensitive to the specification of the variance and higher moments.

JEL Classification: F31

Suggested Citation

Mahieu, Ronald J. and Koedijk, Kees G., Hedging Foreign Currency Exposure: Do Fat Tails Matter? (August 1994 ). Available at SSRN: https://ssrn.com/abstract=5744

Ronald J. Mahieu (Contact Author)

Tilburg University - Center for Economic Research, Econometrics and Finance Group ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2430 (Phone)
+31 13 466 3280 (Fax)

HOME PAGE: http://center.uvt.nl/staff/mahieu/

TiasNimbas Business School ( email )

Warandelaan 2
Tilburg, North-Brabant 5071HS
Netherlands

Kees G. Koedijk

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 4663048 (Phone)
+31 13 4662052 (Fax)

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