That Courage is not inconsistent with Caution: Foreign Currency Hedging for Superannuation Funds

Susan Thorp

No 148, Econometric Society 2004 Australasian Meetings from Econometric Society

Abstract: Surveys of Australian superannuation funds verify that most international bond holdings, but not equity holdings, are hedged for currency risk. We compare the mean-variance efficiency of this practice with two alternative strategies: a conventional forward hedge; and a selective hedge triggered by the sign of the interest differential. These strategies produce optimal allocations which stochastically dominate the restricted portfolio according to Barrett-Donald (2003) tests. The advantages of alternative hedging strategies remain when the vector of sample mean returns is replaced by forecasts. Selective hedging works best for equities; conventional hedging for bonds. Adding unhedged bonds does not improve outcomes

Keywords: currency hedging; portfolio allocation; stochastic dominance (search for similar items in EconPapers)
JEL-codes: G11 G15 G23 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-ifn and nep-rmg
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