IDEAS home Printed from https://ideas.repec.org/a/cii/cepiie/2010-q1-121-1.html
   My bibliography  Save this article

The Introduction of Emerging Currencies into a Portfolio: Towards a more Complete Diversification Model

Author

Listed:
  • Stéphanie Prat
  • Sophie Brana

Abstract

We draw on portfolio theory and international diversification in order to analyse strategies allowing to reduce emerging economies' exposure to exchange-rate risk. We show in particular that it may be efficient for an investor, in terms of maximising the return-to-risk ratio, to build up a portfolio of emerging-country assets denominated in local currency - unhedged against currency risk - compared with a strategy including emerging-country securities denominated in foreign currencies. This strategy would lead to a reduction in the original sin (i.e. the inability of emerging economies to borrow in local currency), and de facto to a reduction in currency mismatches in the balance sheets of emerging economies.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Stéphanie Prat & Sophie Brana, 2010. "The Introduction of Emerging Currencies into a Portfolio: Towards a more Complete Diversification Model," International Economics, CEPII research center, issue 121, pages 5-24.
    • Handle: RePEc:cii:cepiie:2010-q1-121-1
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S2110701713600062
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Barry Eichengreen & Ricardo Hausmann & Ugo Panizza, 2007. "Currency Mismatches, Debt Intolerance, and the Original Sin: Why They Are Not the Same and Why It Matters," NBER Chapters, in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices, and Consequences, pages 121-170, National Bureau of Economic Research, Inc.
    2. Burger, John D. & Warnock, Francis E., 2007. "Foreign participation in local currency bond markets," Review of Financial Economics, Elsevier, vol. 16(3), pages 291-304.
    3. Hwang, Soosung & Pedersen, Christian S., 2004. "Asymmetric risk measures when modelling emerging markets equities: evidence for regional and timing effects," Emerging Markets Review, Elsevier, vol. 5(1), pages 109-128, March.
    4. Harlow, W. V. & Rao, Ramesh K. S., 1989. "Asset Pricing in a Generalized Mean-Lower Partial Moment Framework: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(3), pages 285-311, September.
    5. Bekaert, Geert & Harvey, Campbell R., 1997. "Emerging equity market volatility," Journal of Financial Economics, Elsevier, vol. 43(1), pages 29-77, January.
    6. Matus Medo & Chi Ho Yeung & Yi-Cheng Zhang, 2008. "How to quantify the influence of correlations on investment diversification," Papers 0805.3397, arXiv.org, revised Feb 2009.
    7. Campbell, Rachel A. & Kraussl, Roman, 2007. "Revisiting the home bias puzzle: Downside equity risk," Journal of International Money and Finance, Elsevier, vol. 26(7), pages 1239-1260, November.
    8. Robert Jarrow & Feng Zhao, 2006. "Downside Loss Aversion and Portfolio Management," Management Science, INFORMS, vol. 52(4), pages 558-566, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Iqbal, Javed & Brooks, Robert & Galagedera, Don UA, 2007. "Robust Tests of the Lower Partial Moment Asset Pricing Model in Emerging Markets," MPRA Paper 25349, University Library of Munich, Germany, revised May 2007.
    2. Karen K. Lewis, 2011. "Global Asset Pricing," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 435-466, December.
    3. Martin Melecky, 2012. "Choosing The Currency Structure Of Foreign‐Currency Debt: A Review Of Policy Approaches," Journal of International Development, John Wiley & Sons, Ltd., vol. 24(2), pages 133-151, March.
    4. Eiji Fujii, 2024. "Currency concentration in sovereign debt, exchange rate cyclicality, and volatility in consumption," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 160(1), pages 169-192, February.
    5. Yao, Haixiang & Huang, Jinbo & Li, Yong & Humphrey, Jacquelyn E., 2021. "A general approach to smooth and convex portfolio optimization using lower partial moments," Journal of Banking & Finance, Elsevier, vol. 129(C).
    6. Bordo, Michael D. & Meissner, Christopher M. & Stuckler, David, 2010. "Foreign currency debt, financial crises and economic growth: A long-run view," Journal of International Money and Finance, Elsevier, vol. 29(4), pages 642-665, June.
    7. Dimic, Nebojsa & Piljak, Vanja & Swinkels, Laurens & Vulanovic, Milos, 2021. "The structure and degree of dependence in government bond markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 74(C).
    8. Tamara Teplova & Evgeniya Shutova, 2011. "A Higher Moment Downside Framework for Conditional and Unconditional Capm in the Russian Stock Market," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 1(2), pages 157-178, December.
    9. Renu Kohli & Pravakar Sahoo & M. Shuheb Khan, 2017. "Developing India's Offshore Local Currency Bond Market: Lessons from Emerging Countries," Working Papers id:12039, eSocialSciences.
    10. Lagoarde-Segot, Thomas & Lucey, Brian M., 2007. "International portfolio diversification: Is there a role for the Middle East and North Africa?," Journal of Multinational Financial Management, Elsevier, vol. 17(5), pages 401-416, December.
    11. Meng, Jingjing, 2016. "Asian emerging-market currencies in the international debt market (1994–2014)," Journal of Asian Economics, Elsevier, vol. 42(C), pages 20-32.
    12. Miyajima, Ken & Mohanty, M.S. & Chan, Tracy, 2015. "Emerging market local currency bonds: Diversification and stability," Emerging Markets Review, Elsevier, vol. 22(C), pages 126-139.
    13. Ayub, Usman & Shah, Syed Zulfiqar Ali & Abbas, Qaisar, 2015. "Robust analysis for downside risk in portfolio management for a volatile stock market," Economic Modelling, Elsevier, vol. 44(C), pages 86-96.
    14. Charles P. Thomas & Francis E. Warnock & Jon Wongswan, 2004. "The Performance of International Equity Portfolios," International Finance Discussion Papers 817, Board of Governors of the Federal Reserve System (U.S.).
    15. Hale, Galina B. & Jones, Peter C. & Spiegel, Mark M., 2020. "Home currency issuance in international bond markets," Journal of International Economics, Elsevier, vol. 122(C).
    16. Ogrokhina, Olena & Rodriguez, Cesar M., 2019. "The effect of inflation targeting and financial openness on currency composition of sovereign international debt," Journal of International Money and Finance, Elsevier, vol. 97(C), pages 1-18.
    17. Galagedera, Don U.A. & Brooks, Robert D., 2007. "Is co-skewness a better measure of risk in the downside than downside beta?: Evidence in emerging market data," Journal of Multinational Financial Management, Elsevier, vol. 17(3), pages 214-230, July.
    18. Thomas Lagoarde-Segot & Brian M. Lucey, 2006. "Portfolio allocations in the Middle East and North Africa," The Institute for International Integration Studies Discussion Paper Series iiisdp141, IIIS.
    19. Agustin S. Benetrix & Beren Demirolmez & Martin Schmitz, 2021. "The shock absorbing role of cross-border investments: net positions versus currency composition," Trinity Economics Papers tep0421, Trinity College Dublin, Department of Economics.
    20. Brandouy, Olivier & Kerstens, Kristiaan & Van de Woestyne, Ignace, 2009. "Exploring Bi-Criteria versus Multi-Dimensional Lower Partial Moment Portfolio Models," Working Papers 2009/29, Hogeschool-Universiteit Brussel, Faculteit Economie en Management.

    More about this item

    Keywords

    International Portfolio Diversification; Original Sin; Emerging Countries; Downside Risk;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cii:cepiie:2010-q1-121-1. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/cepiifr.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.