Currency hedging for international stock portfolios: The usefulness of mean–variance analysis

✍ Scribed by Frans A. de Roon; Theo E. Nijman; Bas J.M. Werker

• Book ID: 117528392
• Publisher: Elsevier Science
• Year: 2003
• Tongue: English
• Weight: 180 KB
• Volume: 27
• Category: Article
• ISSN: 0378-4266
• DOI: 10.1016/s0378-4266(01)00251-5

✦ Synopsis

We test whether hedging currency risk improves the performance of international stock portfolios.We show that an auxiliary regression provides a wealth of information about the optimal portfolio holdings for non-mean-variance investors, analogous to the information provided by the Jensen regression about optimal portfolio holdings for the mean-variance case. We find that static hedging with currency forwards does not lead to significant improvements in portfolio performance for a US-Dollar based stock portfolio from the G5 countries, whereas dynamic hedges that are conditional on the interest rate spread do. These conclusions hold for both mean-variance and power utility investors and show up both in-sample and outof-sample. However, the optimal forward positions can differ significantly for both types of investors.