Global Currency Hedging
Over the period 1975 to 2005, the US dollar (particularly in relation to the Canadian dollar) and the euro and Swiss franc (particularly in the second half of the period) have moved against world equity markets. Thus these currencies should be attractive to risk-minimizing global equity investors despite their low average returns. 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. There is little evidence that risk-minimizing investors should adjust their currency positions in response to movements in interest differentials.
Viceira acknowledges the financial support of the Division of Research of the Harvard Business School. We are grateful to Roderick Molenaar, Sam Thompson, Tuomo Vuolteenaho, and seminar participants at Brandeis University, Boston University, the University of Illinois at Urbana-Champaign, and Harvard University for comments and suggestions. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
John Y. Campbell & Karine Serfaty-De Medeiros & Luis M. Viceira, 2010. "Global Currency Hedging," Journal of Finance, American Finance Association, vol. 65(1), pages 87-121, 02. citation courtesy of