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Conditional currency hedging
Author(s) -
Bucher Melk C.
Publication year - 2019
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/fima.12287
Subject(s) - sharpe ratio , volatility (finance) , economics , currency , foreign exchange risk , hedge , equity (law) , bond , financial economics , econometrics , foreign exchange , monetary economics , portfolio , finance , ecology , political science , law , biology
I propose a simple and robust approach to hedge currency risk that can be directly applied by international investors in diverse asset classes. Compared to current mean‐variance approaches, it is robust to overfitting and thus better anticipates risk‐minimizing currency positions for global equity, bond, and commodity investors out of sample. Furthermore, correlations among currencies, equities, and commodities can be predicted by lagged implied foreign exchange volatility. This allows investors to dynamically adjust their hedges, resulting in significantly lower risk compared to other hedging alternatives while maintaining or even improving Sharpe ratio, particularly during crisis periods.