Journal of Financial Economics Vol. 136 No. 3 2020
Global currency hedging with common risk factors
Abstract
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.
- DOI
- 10.1016/j.jfineco.2019.12.001
- Volume
- 136
- Issue
- 3
- Pages
- 780-805
- Language
- en
- Sources
- crossref bibtex:phds-export.bib openalex