Foreign Currency for Long-Term Investors

Luis Viceira (lviceira@hbs.edu), John Campbell and Joshua White

Scholarly Articles from Harvard University Department of Economics

Abstract: Conventional wisdom holds that conservative investors should avoid exposure to foreign currency risk. Even if they hold foreign equities, they should hedge the currency exposure of these positions and hold only domestic Treasury bills. This paper argues that the conventional wisdom may be wrong for long-term investors. Domestic bills are risky for long-term investors, because real interest rates vary over time and bills must be rolled over at uncertain future interest rates. This risk can be hedged by holding foreign currency if the domestic currency tends to depreciate when the domestic real interest rate falls. Empirically this effect is important and can lead conservative long-term investors to hold more than half their wealth in foreign currency.

Date: 2003
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Published in The Economic Journal

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Journal Article: Foreign Currency for Long-Term Investors (2003)
Working Paper: Foreign Currency for Long-Term Investors (2002)
Working Paper: Foreign Currency for Long-Term Investors (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:hrv:faseco:3128708

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