Optimal currency hedging for European investors in the U.S. markets

No Thumbnail Available
Journal Title
Journal ISSN
Volume Title
School of Business | Master's thesis
Date
2024
Major/Subject
Mcode
Degree programme
Finance
Language
en
Pages
73
Series
Abstract
In this paper I use historical data from the US markets between 2003 and 2022 to show that a European investor should not have hedged away their USD currency risk in order to maximize the performance of equity-heavy portfolios measured with Sharpe ratio. The results show that as long as the equity share in their portfolio is significant and thus higher than the share of bond instruments in the portfolio, the Sharpe-maximizing hedge ratio is greatly negative. The results suggest that with bond-heavy portfolios hedging may have been beneficial in a longer term, but no statistically significant or robust conclusions can be drawn from these results. The results of not-beneficial hedging of equity portfolios is consistent with prior literature and robust to different sample periods, equity indices and measures of cost of hedging.
Description
Thesis advisor
Puttonen, Vesa
Keywords
currency hedging, asset management, portfolio optimization, minimum-variance optimization
Other note
Citation