The Hedging Cost of Forgetting the Exchange Rate



Downloads per month over past year

De la Flor, Beatriz and Ojea Ferreiro, Javier and Ferreira, Eva (2022) The Hedging Cost of Forgetting the Exchange Rate. [ Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE); nº 01, 2022, ISSN: 2341-2356 ]

[thumbnail of 2201.pdf]


The safe-haven property of gold has been widely studied, although little attention has been paid to how exchange rate movements could affect hedging strategies. We analyse the exchange rate role in stock portfolios hedged with gold in several regions from the point of view of non-US and US investors, using vine copulas to model the relation between gold, stock and exchange rates.
We find a leading role played by exchange rate hedging stock losses, which outstrips the position of gold (index) in non-US (US) portfolios. The inclusion of the exchange rate can reduce the ES between 107 and 162 bps. An out-of-sample exercise supports our results.
The implications of this study go beyond risk management decisions. Regulatory and supervisory authorities might find tools to assess the performance of financial assets under market distress scenarios.

Item Type:Working Paper or Technical Report
Uncontrolled Keywords:Exchange rate risk; Hedging strategy; Risk measures; Tail dependence; Vine copula.
Subjects:Sciences > Statistics > Mathematical optimization
Social sciences > Economics > Money
Social sciences > Economics > Econometrics
Social sciences > Economics > Stock exchanges
JEL:C52, C58, C61, F13, G1
Series Name:Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE)
ID Code:70098
Deposited On:07 Feb 2022 12:50
Last Modified:07 Feb 2022 12:53

Origin of downloads

Repository Staff Only: item control page