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Exchange Rate Risk and International Equity Portfolio Diversification: A South African Investor’s Perspective

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Listed:
  • Charles Raoul Tchuinkam Djemo
  • John Weirstrass Muteba Mwamba
  • Mathias Mandla Manguzvane

    (University of Johannesburg)

Abstract

This paper examines the impact of foreign exchange rate risk on the expected return of a South African based investor's portfolio. We use the GARCH based Value at Risk (VaR) to compute the upside and downside risk measures while the generalised Pareto distribution (GPD) method is applied to separate left tail risk from right tail risk. Our findings reveal that international diversification substantially enhances the South African investor's portfolio return, with a noticeable yield increase in China, Brazil, Argentina, Mexico, and Russia. Furthermore, the Singaporean dollar and Chinese Yuan are found to have a negative impact on the portfolio return, while the rest of the currencies have a positive impact on the portfolio return. Moreover, we found that exchange rate risk is underestimated when using the variance-covariance method.

Suggested Citation

  • Charles Raoul Tchuinkam Djemo & John Weirstrass Muteba Mwamba & Mathias Mandla Manguzvane, 2021. "Exchange Rate Risk and International Equity Portfolio Diversification: A South African Investor’s Perspective," The African Finance Journal, Africagrowth Institute, vol. 23(2), pages 36-49.
    • Handle: RePEc:afj:journl:v:23:y:2021:i:2:p:36-49
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    File URL: https://journals.co.za/doi/abs/10.10520/ejc-finj_v23_n2_a3
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    More about this item

    Keywords

    International Diversification; Exchange Rate Risk; Portfolio Selection; Value at Risk;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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