Currency hedging strategies in strategic benchmarks and the global and Euro sovereign financial crises

Massimiliano Caporin, Juan Jimenez-Martin and Lydia Gonzalez-Serrano

Journal of International Financial Markets, Institutions and Money, 2014, vol. 31, issue C, 159-177

Abstract: This paper investigates dynamic currency hedging benefits, with a further focus on the impact of currency hedging before and during the recent financial crises originated from the subprime and the Euro sovereign bonds. We take the point of view of a Euro-based institutional investor who considers passive investment strategies in portfolios holding Euro-denominated and non-Euro (foreign) assets. We analyze the impact of the model specification to improve the risk-return trade-off when currency risk is hedged. Hedging strategies of currency risk, using exchange rate futures and driven by several multivariate GARCH models, depend on the portfolio composition and period analyzed. Dynamic covariance models provide limited evidences of a decrease in hedging ratios compared to naïve hedging strategies based on linear regressions or variance smoothing. Nevertheless, those results are coupled with better performances of dynamic covariance models in terms of hedging effectiveness and improved Sharpe ratios.

Keywords: Multivariate GARCH; Conditional correlations; Currency futures; Optimal hedge ratios; Hedging strategies (search for similar items in EconPapers)
JEL-codes: C32 C53 C58 G01 G11 G15 G17 G23 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Working Paper: Currency hedging strategies, strategic benchmarks and the Global and Euro Sovereign financial crises (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:31:y:2014:i:c:p:159-177

DOI: 10.1016/j.intfin.2014.03.015

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