Country-Based Investing with Exchange Rate and Reserve Currency

Valentina Galvani

No 2022-5, Working Papers from University of Alberta, Department of Economics

Abstract: This study examines how style investing impacts correlations in a small and large economy, with exchange rate risk, and a reserve currency. The results show that style investing increases correlations in both economies, but more so in the smaller market. The impact of style investing on either country's correlations depends nonlinearly on the volatility of the exchange rate and the strength of the reserve currency effect. Higher levels of risk aversion amplify the impact of style investing on correlations. Imprecise signals and country preferences increase correlation distortions. The results have risk management implications for portfolio diversification.

Keywords: Style investing; International Markets; Portfolio Diversification; Return Correlations; International Markets (search for similar items in EconPapers)
JEL-codes: G10 G11 G12 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2022-03-24
New Economics Papers: this item is included in nep-mon, nep-opm and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:ris:albaec:2022_005

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