Reference
Barroso, P., Menichetti, M., & Reichenecker, J.-A. (2018). Hedging with an Edge: Parametric Currency Overlay. Paper presented at the EFMA European Financial Management Association, Annual Meeting 2018, Milan.
Publication type
Paper in Conference Proceedings
Abstract
Campbell, Serfaty-De Medeiros, and Viceira (2010) propose an optimized method to hedge currency risk in portfolios of international equities. In a demanding out-of-sample test, incorporating transaction and rebalancing costs, and margin requirements we find their method reduces risk in real time, but also underperforms economically a naïve alternative or even a purely domestic portfolio. We propose modeling the currency hedging strategy as a function of characteristics proxying for expected returns and risk. We find that using currency momentum, value, carry, and autocorrelation significantly reduces the cost of hedging. Proxies for risk, such as volatility, skewness, beta on volatility, and equity sensitivity are irrelevant in our optimizations. Our optimal strategy is close to a fully hedged portfolio, but with a sizable 38% gain in Sharpe ratio.
Research
- Enhanced Carry Trades - A new Approach in Asset Management and Trading
- PhD-Thesis, February 2014 until February 2018 (finished)
Standard carry trades sell low-yield currencies and buy high-yield currencies. The trading idea is to capture the interest rate differential between currencies. The unique selection criterion of ... more ...
Persons
Organizational Units
- Chair in Business Administration, Banking and Financial Management
- Institute for Finance