TY  - JOUR
AU  - Campbell,John Y.
AU  - Medeiros,Karine Serfaty-de
AU  - Viceira,Luis M.
TI  - Global Currency Hedging
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13088
PY  - 2007
Y2  - May 2007
UR  - http://www.nber.org/papers/w13088
L1  - http://www.nber.org/papers/w13088.pdf
N1  - Author contact info:
John Y. Campbell
Morton L. and Carole S.
Olshan Professor of Economics
Department of Economics
Harvard University
Littauer Center 213
Cambridge, MA 02138
Tel: 617/496-6448
Fax: 617/495-7730
E-Mail: john_campbell@harvard.edu

Karine Serfaty-de Medeiros
Department of Economics
Littauer Center
Harvard University
Cambridge, MA 02138
E-Mail: kdemed@fas.harvard.edu

Luis M. Viceira
Baker Library 367
Graduate School of Business Administration
Harvard University
Boston, MA 02163
Tel: 617/495-6331
Fax: 617/496-6593
E-Mail: lviceira@hbs.edu
AB  - This paper considers the risk management problem of an investor who holds a diversified portfolio of global equities or bonds and chooses long or short positions in currencies to manage the risk of the total portfolio.  Over the period 1975-2005, we find that a risk-minimizing global equity investor should short the Australian dollar, Canadian dollar, Japanese yen, and British pound but should hold long positions in the US dollar, the euro, and the Swiss franc.  The resulting currency position tends to rise in value when equity markets fall.   This strategy works well for investment horizons of one month to one year.  In the past 15 years the risk-minimizing demand for the dollar appears to have weakened slightly, while demands for the euro and Swiss franc have strengthened.  These changes may reflect the growing role for the euro as a reserve currency in the international financial system.  The risk-minimizing currency strategy for a global bond investor is close to a full currency hedge, with a modest long position in the US dollar.  Risk-reducing currencies have had lower average returns during our sample period, but the difference in average returns is smaller than would be implied by the global CAPM given the historical equity premium.  
ER  -