Department of Economics and Business Economics

Dynamic Global Currency Hedging

Research output: Working paperResearch

Standard

Dynamic Global Currency Hedging. / Christensen, Bent Jesper; Varneskov, Rasmus T.

Aarhus, 2016.

Research output: Working paperResearch

Harvard

Christensen, BJ & Varneskov, RT 2016 'Dynamic Global Currency Hedging' Aarhus.

APA

Christensen, B. J., & Varneskov, R. T. (2016). Dynamic Global Currency Hedging. CREATES Research Papers, No. 2016-03

CBE

Christensen BJ, Varneskov RT. 2016. Dynamic Global Currency Hedging. Aarhus.

MLA

Christensen, Bent Jesper and Rasmus T. Varneskov Dynamic Global Currency Hedging. Aarhus. (CREATES Research Papers; Journal number 2016-03). 2016., 63 p.

Vancouver

Christensen BJ, Varneskov RT. Dynamic Global Currency Hedging. Aarhus. 2016 Jan 19.

Author

Christensen, Bent Jesper ; Varneskov, Rasmus T. / Dynamic Global Currency Hedging. Aarhus, 2016. (CREATES Research Papers; No. 2016-03).

Bibtex

@techreport{74c3b5e61469422f8f15b95a0ac0c0fa,
title = "Dynamic Global Currency Hedging",
abstract = "This paper proposes a model for discrete-time hedging based on continuous-time movements in portfolio and foreign currency exchange rate returns. In particular, the vector of optimal currency exposures is shown to be given by the negative realized regression coefficients from a one-period conditional expectation of the intra-period quadratic covariation matrix for portfolio and foreign exchange rate returns. These are labelled the realized currency betas. The model, hence, facilitates dynamic hedging strategies that depend exclusively on the dynamic evolution of the ex-post quadratic covariation matrix. These hedging strategies are suggested implemented using modern, yet simple, non-parametric techniques to accurately measure and dynamically model historical quadratic covariation matrices. The empirical results from an extensive hedging exercise for equity investments illustrate that the realized currency betas exhibit important time variation, leading to substantial economic, as well as statistically significant, volatility reductions from the proposed hedging strategies, compared to existing benchmarks, without sacrificing returns. As a result, a risk-averse investor is shown to be willing to pay several hundred basis points to switch from existing hedging methods to the proposed realized currency beta approach. Interestingly, the empirical analysis strongly suggests that the superior performance of the latter during the most recent global financial crisis of 2008 is, at least partially, funded by carry traders.",
keywords = "Currency Hedging, Foreign Exchange Rates, High-frequency Data, Infill Asymptotics, Mean-Variance Analyis, Quadratic Covariation, Realized Currency Beta",
author = "Christensen, {Bent Jesper} and Varneskov, {Rasmus T.}",
year = "2016",
month = jan,
day = "19",
language = "English",
series = "CREATES Research Papers",
publisher = "Institut for {\O}konomi, Aarhus Universitet",
number = "2016-03",
type = "WorkingPaper",
institution = "Institut for {\O}konomi, Aarhus Universitet",

}

RIS

TY - UNPB

T1 - Dynamic Global Currency Hedging

AU - Christensen, Bent Jesper

AU - Varneskov, Rasmus T.

PY - 2016/1/19

Y1 - 2016/1/19

N2 - This paper proposes a model for discrete-time hedging based on continuous-time movements in portfolio and foreign currency exchange rate returns. In particular, the vector of optimal currency exposures is shown to be given by the negative realized regression coefficients from a one-period conditional expectation of the intra-period quadratic covariation matrix for portfolio and foreign exchange rate returns. These are labelled the realized currency betas. The model, hence, facilitates dynamic hedging strategies that depend exclusively on the dynamic evolution of the ex-post quadratic covariation matrix. These hedging strategies are suggested implemented using modern, yet simple, non-parametric techniques to accurately measure and dynamically model historical quadratic covariation matrices. The empirical results from an extensive hedging exercise for equity investments illustrate that the realized currency betas exhibit important time variation, leading to substantial economic, as well as statistically significant, volatility reductions from the proposed hedging strategies, compared to existing benchmarks, without sacrificing returns. As a result, a risk-averse investor is shown to be willing to pay several hundred basis points to switch from existing hedging methods to the proposed realized currency beta approach. Interestingly, the empirical analysis strongly suggests that the superior performance of the latter during the most recent global financial crisis of 2008 is, at least partially, funded by carry traders.

AB - This paper proposes a model for discrete-time hedging based on continuous-time movements in portfolio and foreign currency exchange rate returns. In particular, the vector of optimal currency exposures is shown to be given by the negative realized regression coefficients from a one-period conditional expectation of the intra-period quadratic covariation matrix for portfolio and foreign exchange rate returns. These are labelled the realized currency betas. The model, hence, facilitates dynamic hedging strategies that depend exclusively on the dynamic evolution of the ex-post quadratic covariation matrix. These hedging strategies are suggested implemented using modern, yet simple, non-parametric techniques to accurately measure and dynamically model historical quadratic covariation matrices. The empirical results from an extensive hedging exercise for equity investments illustrate that the realized currency betas exhibit important time variation, leading to substantial economic, as well as statistically significant, volatility reductions from the proposed hedging strategies, compared to existing benchmarks, without sacrificing returns. As a result, a risk-averse investor is shown to be willing to pay several hundred basis points to switch from existing hedging methods to the proposed realized currency beta approach. Interestingly, the empirical analysis strongly suggests that the superior performance of the latter during the most recent global financial crisis of 2008 is, at least partially, funded by carry traders.

KW - Currency Hedging, Foreign Exchange Rates, High-frequency Data, Infill Asymptotics, Mean-Variance Analyis, Quadratic Covariation, Realized Currency Beta

M3 - Working paper

T3 - CREATES Research Papers

BT - Dynamic Global Currency Hedging

CY - Aarhus

ER -