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Is currency hedging necessary for emerging-market equity investment?

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  • Kim, Daehwan

Abstract

When a developed-market investor buys emerging-market stocks, this investor may be justified not to hedge currency risk. Our analysis indicates that completely unhedged portfolios often perform better than fully hedged portfolios and are not significantly inferior to optimally hedged portfolios. We provide a carry-profit-based explanation of this finding.

Suggested Citation

  • Kim, Daehwan, 2012. "Is currency hedging necessary for emerging-market equity investment?," Economics Letters, Elsevier, vol. 116(1), pages 67-71.
    • Handle: RePEc:eee:ecolet:v:116:y:2012:i:1:p:67-71
    DOI: 10.1016/j.econlet.2012.01.008
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    References listed on IDEAS

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    1. Kandel, Shmuel & Stambaugh, Robert F, 1989. "A Mean-Variance Framework for Tests of Asset Pricing Models," The Review of Financial Studies, Society for Financial Studies, vol. 2(2), pages 125-156.
    2. 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, February.
    3. Solnik, Bruno H., 1974. "An equilibrium model of the international capital market," Journal of Economic Theory, Elsevier, vol. 8(4), pages 500-524, August.
    4. Glen, Jack & Jorion, Philippe, 1993. "Currency Hedging for International Portfolios," Journal of Finance, American Finance Association, vol. 48(5), pages 1865-1886, December.
    5. Kandel, Shmuel, 1984. "The likelihood ratio test statistic of mean-variance efficiency without a riskless asset," Journal of Financial Economics, Elsevier, vol. 13(4), pages 575-592, December.
    6. Black, Fischer, 1990. "Equilibrium Exchange Rate Hedging," Journal of Finance, American Finance Association, vol. 45(3), pages 899-907, July.
    7. Gibbons, Michael R & Ross, Stephen A & Shanken, Jay, 1989. "A Test of the Efficiency of a Given Portfolio," Econometrica, Econometric Society, vol. 57(5), pages 1121-1152, September.
    8. Cadsby, Charles Bram, 1986. "Performance Hypothesis Testing with the Sharpe and Treynor Measures: A Comment," Journal of Finance, American Finance Association, vol. 41(5), pages 1175-1176, December.
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    Cited by:

    1. Fabio Filipozzi & Kersti Harkmann, 2014. "Currency hedge – walking on the edge?," Bank of Estonia Working Papers wp2014-5, Bank of Estonia, revised 10 Oct 2014.

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    More about this item

    Keywords

    Currency hedging; Emerging market; Carry profit;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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