Global currency hedging with common risk factors
Wei Opie and
Steven J. Riddiough
Journal of Financial Economics, 2020, vol. 136, issue 3, 780-805
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.
Keywords: Global currency hedging; Currency risk factors; Currency returns; International portfolio diversification; Mean-variance optimization (search for similar items in EconPapers)
JEL-codes: F31 G11 G15 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:136:y:2020:i:3:p:780-805
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