Optimal Currency Hedging: Horizon Matters

IF 0.4 Q4 BUSINESS, FINANCE
Nelson Arruda, Alain Bergeron, M. Kritzman
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引用次数: 0

Abstract

Investors have long debated what fraction of their portfolios’ currency exposure they should hedge, if any. The answers cover a broad range, often with dubious rationale. Yet most informed investors agree that the solution should use mean–variance optimization to maximize expected utility or, when the return means are assumed to equal zero, minimize risk. However, this approach presents a serious challenge because it depends on how currencies covary with each other and with the underlying portfolio, and these covariances, themselves, vary significantly with the return interval used to estimate them. The authors show that monthly covariances produce unreliable results for horizons that are longer than one month. TOPICS: Currency, portfolio construction, quantitative methods, statistical methods, risk management, global markets Key Findings ▪ Investors understand that currency exposure introduces unnecessary risk to globally diversified portfolios. In the absence of views about the direction of future currency returns, they recognize they should manage this risk by hedging some fraction of this currency exposure. ▪ Sophisticated investors rely on mean–variance optimization to determine the specific fraction of currency exposure to hedge to minimize risk. Still, they typically misestimate volatilities and correlations because they use the wrong return interval to estimate these values. ▪ Our research shows that the increase in risk resulting from using the wrong return interval to estimate hedge ratios is significant, about the same magnitude as misallocating a 50/50 stock/bond portfolio by 10% and without compensation of a higher expected return.
最优货币套期保值:地平线问题
长期以来,投资者一直在争论,如果有的话,他们应该对冲投资组合中的货币敞口的哪一部分。答案涵盖范围很广,通常有可疑的理由。然而,大多数知情的投资者都认为,解决方案应该使用均值-方差优化来最大化预期效用,或者,当回报均值等于零时,将风险降至最低。然而,这种方法带来了严重的挑战,因为它取决于货币之间以及与基础投资组合的协变量,而这些协变量本身随着用于估计它们的回报区间而显著变化。作者表明,对于超过一个月的视界,月度协变量会产生不可靠的结果。主题:货币、投资组合构建、量化方法、统计方法、风险管理、全球市场关键发现▪ 投资者明白,货币风险敞口会给全球多元化投资组合带来不必要的风险。在对未来货币回报方向缺乏看法的情况下,他们认识到应该通过对冲部分货币风险来管理这种风险。▪ 成熟的投资者依靠均值-方差优化来确定对冲货币敞口的具体比例,以将风险降至最低。尽管如此,他们通常会错误估计波动率和相关性,因为他们使用了错误的回报区间来估计这些值。▪ 我们的研究表明,使用错误的回报区间来估计对冲比率所导致的风险增加是显著的,与将50/50的股票/债券投资组合错配10%的程度大致相同,而且没有补偿更高的预期回报。
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来源期刊
CiteScore
1.50
自引率
14.30%
发文量
40
期刊介绍: The Journal of Alternative Investments (JAI) provides you with cutting-edge research and expert analysis on managing investments in hedge funds, private equity, distressed debt, commodities and futures, energy, funds of funds, and other nontraditional assets. JAI is the official publication of the Chartered Alternative Investment Analyst Association (CAIA®). JAI provides you with challenging ideas and practical tools to: •Profit from the growth of hedge funds and alternatives •Determine the optimal mix of traditional and alternative investments •Measure and track portfolio performance •Manage your alternative investment portfolio with proven risk management practices
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