Should pension funds hedge currency risk? The case of Poland

Radoslaw Kurach () and Daniel Papla ()
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Radoslaw Kurach: Faculty of Economic Sciences, Wroclaw University of Economics, Wroclaw, Poland
Daniel Papla: Faculty of Management, Information Systems and Finance, Wrocław University of Economics, Wrocław, Poland

Baltic Journal of Economics, 2016, vol. 16, issue 2, 81-94

Abstract: In this study, we identify the optimal hedge ratio for mandatory pension funds, defining the optimum as the value that minimizes the portfolio variance in accordance with the social objective of the mandatory pension system. Unlike most previous studies, we apply a dynamic framework to account for a regular inflow of contributions and impose specific investment constraints that make the simulation more realistic. Our outcomes challenge the conventional knowledge concerning the need for currency hedging. We discover that in the case of Poland, shortening the currency positions is undesirable, as it amplifies the portfolio variance. Moreover, we provide evidence that pension funds should internationalize their portfolios even further to fully exploit the available diversification gains. Finally, the obtained simulation results are matched with real data. The comparison presented tends to beg the question of how to overcome the home bias phenomenon.

Keywords: Pension funds; currency hedging; home bias; investment constraints (search for similar items in EconPapers)
JEL-codes: G11 G15 H55 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:bic:journl:v:16:y:2016:i:2:p:81-94

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