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Evaluating hedging strategies in the foreign exchange market with the stochastic dominance approach

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  • Yi-Chein Chiang
  • Tung Liang Liao
  • Tse-An Hsiao

Abstract

This study uses stochastic dominance theory, which is distribution free, to evaluate eight foreign exchange hedging strategies for six currencies in terms of US Dollar from 1990 to 2007. Our results show that 'always hedge' is the best performing strategy for European currencies such as British Pound, Euro and Swiss Franc. However, the Forward Hedge Rule (hedging when forward rate is at a premium) generally outperforms the other seven strategies for currencies such as Canadian Dollar, Hong Kong Dollar and Japanese Yen. Our results can be a reference for decision makers to design their hedging strategies in the foreign exchange market.

Suggested Citation

  • Yi-Chein Chiang & Tung Liang Liao & Tse-An Hsiao, 2011. "Evaluating hedging strategies in the foreign exchange market with the stochastic dominance approach," Applied Financial Economics, Taylor & Francis Journals, vol. 21(7), pages 493-503.
    • Handle: RePEc:taf:apfiec:v:21:y:2011:i:7:p:493-503
    DOI: 10.1080/09603107.2010.532111
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    Cited by:

    1. Wang, Ming-Hui & Ke, Mei-Chu & Liang Liao, Tung & Chiang, Yi-Chein & Hsu, Chuan-Hao, 2020. "Alternative estimation method of earnings growth rate for PEGR strategy," The North American Journal of Economics and Finance, Elsevier, vol. 53(C).

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