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Currency Hedging Over Long Horizons

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  • Kenneth A. Froot

    (Harvard University and NBER)

Abstract

This paper reexamines the widely-held wisdom that the currency exposure of international investments should be entirely hedged. It finds that the previously-documented ability of hedges to reduce portfolio return variance holds at short horizons, but not at long horizons. At horizons of several years, complete hedging not only does not lower return variance, it actually increases the return variance of many portfolios. Hedge ratios chosen to minimize longrun return variance are not only low, they also have no perceptible impact on return variance. The paper reports and explores these results, their apparent causes, and investigates their implications for hedging practice.

Suggested Citation

  • Kenneth A. Froot, 2019. "Currency Hedging Over Long Horizons," Annals of Economics and Finance, Society for AEF, vol. 20(1), pages 37-66, May.
    • Handle: RePEc:cuf:journl:y:2019:v:20:i:1:froot
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    References listed on IDEAS

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