The Hedging Cost of Forgetting the Exchange Rate

Beatriz de la Flor (), Javier Ojea-Ferreiro () and Eva Ferreira
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Beatriz de la Flor: Universidad Complutense de Madrid and ICAE (Spain).
Javier Ojea-Ferreiro: Universidad Complutense de Madrid and ICAE (Spain).
Authors registered in the RePEc Author Service: Javier Ojea Ferreiro

No 2022-01, Documentos de Trabajo del ICAE from Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico

Abstract: The safe-haven property of gold has been widely studied, although little attention has been paid to how exchange rate movements could affect hedging strategies. We analyse the exchange rate role in stock portfolios hedged with gold in several regions from the point of view of non-US and US investors, using vine copulas to model the relation between gold, stock and exchange rates. We find a leading role played by exchange rate hedging stock losses, which outstrips the position of gold (index) in non-US (US) portfolios. The inclusion of the exchange rate can reduce the ES between 107 and 162 bps. An out-of-sample exercise supports our results. The implications of this study go beyond risk management decisions. Regulatory and supervisory authorities might find tools to assess the performance of financial assets under market distress scenarios.

Keywords: Exchange rate risk; Hedging strategy; Risk measures; Tail dependence; Vine copula. (search for similar items in EconPapers)
JEL-codes: C52 C58 C61 F13 G1 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2022
New Economics Papers: this item is included in nep-cwa, nep-mon and nep-rmg
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