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Currency hedging strategies, strategic benchmarks and the Global and Euro Sovereign financial crises

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Caporin, Massimiliano and Jimenez-Martin, Juan-Angel and González Serrano, Lydia (2013) Currency hedging strategies, strategic benchmarks and the Global and Euro Sovereign financial crises. [ Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE); nº 36, 2013, ] (Unpublished)

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Official URL: http://eprints.ucm.es/23338/


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Abstract

This paper investigates dynamic currency hedging benefits, with a further focus on the impact of currency hedging before and during the recent financial crises originated from the subprime and the Euro sovereign bonds. We take the point of view of a Euro-based institutional investor who considers passive investment strategies in portfolios holding European, British and US assets. We analyze the impact of the model specification to improve the risk-return tradeoff when currency risk is hedged. Hedging strategies of currency risk, using exchange rates futures and driven by several multivariate GARCH models, depend on the portfolio composition and period analyzed. Dynamic covariance models provide limited evidences of a decrease in hedging rations compared to naïve hedging strategies based on linear regressions or variance smoothing. Nevertheless, those results are coupled with better performances of dynamic covariance models in terms of hedging effectiveness an improved Sharpe ratios. The empirical evidences are observed both in-sample as well as in an out-of-sample exercise.


Item Type:Working Paper or Technical Report
Additional Information:

JEL codes: C32, C53, C58, G01, G11, G15, G17, G23, G32.

The first author acknowledges financial support from MIUR PRIN project MISURA - Multivariate Statistical Models for Risk Assessment and from the European Union, Seventh Framework Programme FP7/2007-2013 under grant agreement SYRTO-SSH-2012-320270. The second author acknowledges financial support of the Ministerio de Ciencia y Tecnología of Spain through the research project ECO2012-31941.
University of Padova, Department of Economics and Management “Marco Fanno”, e-mail: massimiliano.caporin@unipd.it
Complutense University of Madrid, Department of Quantitative Economics, e-mail: juanangel@ccee.ucm.es. Corresponding author
Rey Juan Carlos University, Department of Business Administration.

Uncontrolled Keywords:Multivariate GARCH, Conditional correlations, Currency futures, Optimal hedge ratios, Hedging strategies.
Subjects:Social sciences > Economics > Econometrics
Series Name:Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE)
Volume:2013
Number:36
ID Code:23338
Deposited On:23 Oct 2013 11:46
Last Modified:16 Feb 2016 09:46

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