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Currency Hedging and Siegel's Paradox: On Black's Universal Hedging Rule *
Author(s) -
Solnik Bruno
Publication year - 1993
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/j.1467-9396.1993.tb00014.x
Subject(s) - economics , hedge , portfolio , currency , financial economics , context (archaeology) , asset (computer security) , inflation (cosmology) , econometrics , monetary economics , paleontology , physics , computer security , theoretical physics , computer science , biology , ecology
In an international multicurrency context, with nonstochastic inflation, equilibrium asset pricing models dictate that all investors should hold a combination of their national risk‐free bill and the world market portfolio partly hedged against currency risk. We show that the equilibrium hedge ratios are not universal and depend on investors' preferences and relative wealth. So‐called universal hedging rules are devoid of solid theoretical underpinning and practical applicability.