Dynamic Global Currency Hedging*

Arbitrage in the Foreign Exchange Market: Turning on the Microscope

Bent Jesper Christensen and Rasmus Tangsgaard Varneskov

Journal of Financial Econometrics, 2021, vol. 19, issue 1, 97-127

Abstract: This article proposes a model for discrete-time currency hedging based on continuous-time movements in portfolio and foreign exchange rate returns. The vector of optimal currency exposures is given by the negative realized regression coefficients from a one-period conditional expectation of the intraperiod quadratic covariation matrix for portfolio and exchange rate returns. Empirical results from an extensive hedging exercise for equity investments illustrate that currency exposures exhibit important time variation, leading to substantial volatility reductions when hedging, without sacrificing returns. A risk-averse investor is willing to pay several hundred annual basis points to switch from existing hedging methods to the proposed dynamic strategies.

Keywords: C; urrency hedging; foreign exchange rates; high-frequency data; quadratic covariation; realized currency beta (search for similar items in EconPapers)
JEL-codes: C32 C58 G11 G15 (search for similar items in EconPapers)
Date: 2021
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Working Paper: Dynamic Global Currency Hedging (2016)
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