THE INTRODUCTION OF EMERGING CURRENCIES INTO A PORTFOLIO: TOWARDS A MORE COMPLETE DIVERSIFICATION MODEL

Sophie Brana and Stéphanie Prat ()
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Stéphanie Prat: Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - UB - Université de Bordeaux

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Abstract: We draw on portfolio theory and international diversification in order to analyse strategies allowing to reduce emerging economies' exposure to exchange-rate risk. We show in particular that it may be efficient for an investor, in terms of maximising the return-to-risk ratio, to build up a portfolio of emerging-country assets denominated in local currency - unhedged against currency risk - compared with a strategy including emerging-country securities denominated in foreign currencies. This strategy would lead to a reduction in the original sin (i.e. the inability of emerging economies to borrow in local currency), and de facto to a reduction in currency mismatches in the balance sheets of emerging economies.

Keywords: International portfolio diversification; Original Sin; Emerging countries; Downside risk (search for similar items in EconPapers)
Date: 2009-03-15
Note: View the original document on HAL open archive server: https://hal.science/hal-00616581v2
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Journal Article: The Introduction of Emerging Currencies into a Portfolio: Towards a more Complete Diversification Model (2010)
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