Dynamic currency hedging for international stock portfolios

Wei Opie, Christine Ann Brown, Jonathan Graeme Dark

    Research output: Contribution to journalArticleResearchpeer-review

    Abstract

    The paper studies dynamic currency risk hedging of international stock portfolios using a currency overlay. A dynamic conditional correlation (DCC) multivariate GARCH model is employed to estimate time-varying covariance among stock market returns and currency returns. The conditional covariance is then used in the estimation of risk-minimizing conditional hedge ratios. The study considers seven developed economies over the period January 2002 to April 2010 and estimates daily conditional hedge ratios for portfolios of various stock market combinations. Conditional hedging is shown to dominate traditional static hedging and unconditional hedging in terms of risk reduction both in-sample and out-of-sample, especially during the recent global financial crisis. Conditional hedging also proves to consistently reduce portfolio risk for various levels of foreign investments.
    Original languageEnglish
    Pages (from-to)419 - 455
    Number of pages37
    JournalReview of Futures Markets
    Volume20
    Issue number4
    Publication statusPublished - 2012

    Cite this

    Opie, Wei ; Brown, Christine Ann ; Dark, Jonathan Graeme. / Dynamic currency hedging for international stock portfolios. In: Review of Futures Markets. 2012 ; Vol. 20, No. 4. pp. 419 - 455.
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    Dynamic currency hedging for international stock portfolios. / Opie, Wei; Brown, Christine Ann; Dark, Jonathan Graeme.

    In: Review of Futures Markets, Vol. 20, No. 4, 2012, p. 419 - 455.

    Research output: Contribution to journalArticleResearchpeer-review

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