Optimal Currency Hedging for International Equity Portfolios

Jacob Boudoukh, Matthew Richardson, Ashwin Thapar and Franklin Wang

Financial Analysts Journal, 2019, vol. 75, issue 4, 65-83

Abstract: This study explores optimal currency exposures in international equity portfolios through the lens of a modified mean–variance optimization framework. We decomposed the optimal currency portfolio into a “hedge portfolio” that uses a dynamic risk model to minimize equity volatility and an “alpha-seeking portfolio” based on the well-documented currency styles of value, momentum, fundamental momentum, and carry. This method is an integrated and economically intuitive approach to currency management that simultaneously provides lower risk and higher returns than either hedged or unhedged benchmarks. Crucially, the solution is practical, with realistic and implementable leverage, turnover, and tail-risk characteristics.Disclaimer: AQR Capital Management is a global investment management firm that may or may not apply similar investment techniques or methods of analysis as described herein. The views expressed here are those of the authors and not necessarily those of AQR.Editor’s noteSubmitted 3 October 2018Accepted 20 May 2019 by Stephen J. Brown.This article was externally reviewed using our double-blind peer-review process. When the article was accepted for publication, the authors thanked the reviewers in their acknowledgments. David Gallagher was one of the reviewers for this article.

Date: 2019
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/0015198X.2019.1628556 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:ufajxx:v:75:y:2019:i:4:p:65-83

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/ufaj20

DOI: 10.1080/0015198X.2019.1628556

Access Statistics for this article

Financial Analysts Journal is currently edited by Maryann Dupes

More articles in Financial Analysts Journal from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().