Global currency hedging with common risk factors

• 成果类型: Article
• 署名作者: Opie, Wei; Riddiough, Steven J.
• 署名单位: Deakin University; University of Melbourne
• 刊物名称: JOURNAL OF FINANCIAL ECONOMICS
• ISSN/ISSBN: 0304-405X
• DOI: 10.1016/j.jfineco.2019.12.001
• 发表日期: 2020
• 页码: 780-805
• 关键词: Global currency hedging; Currency risk factors; Currency returns; international portfolio diversification; Mean-variance optimization

摘要

We develop a novel method to dynamically hedge foreign exchange exposure in international equity and bond portfolios. The method exploits the time-series predictability of currency returns, which we show emerges from exploiting a forecastable component in global factor returns. The hedging strategy outperforms leading alternative approaches to currency hedging across a large set of performance metrics. Moreover, we find that exploiting currency return predictability via an independent currency portfolio delivers a high risk-adjusted return and provides superior diversification gains to global equity and bond investors relative to currency carry, value, and momentum investment strategies. (C) 2019 Elsevier B.V. All rights reserved.