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Country and currency diversification of bond investments: do they really make sense for Swiss investors?

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  • Nicola Carcano

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    Abstract

    The inclusion of hedged or unhedged foreign currency bonds within a strategic asset allocation is a crucial decision which should be analyzed carefully. The goal of this paper is to provide a contribution to this analysis by focusing particularly on the time horizon of the investment. Results are analyzed from the perspective of a Swiss investor. We find that over the last 21 years, investing in bonds denominated in Swiss Francs has been clearly less efficient in terms of risk-adjusted returns than investing in a hedged global bond portfolio. For short-term investors, we find robust evidence against the hypothesis of investing in unhedged foreign currency bonds. The picture changes dramatically, however, when we consider an investment horizon of 6 years and the normal case of balanced portfolios including also equities and domestic bonds. In this case, the optimal strategy for the period we analyzed would have been to hedge only the exposure to US dollar bonds. Copyright Swiss Society for Financial Market Research 2007

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    File URL: http://hdl.handle.net/10.1007/s11408-006-0034-2
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    Bibliographic Info

    Article provided by Springer in its journal Financial Markets and Portfolio Management.

    Volume (Year): 21 (2007)
    Issue (Month): 1 (March)
    Pages: 95-120

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    Handle: RePEc:kap:fmktpm:v:21:y:2007:i:1:p:95-120

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    Web page: http://www.springerlink.com/link.asp?id=119763

    Related research

    Keywords: Bonds; Currency risk; Hedging; International diversification; Optimal portfolios; F31; G11;

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    1. Haefliger, Thomas & Waelchli, Urs & Wydler, Daniel, 2002. "Hedging currency risk: Does it have to be so complicated?," MPRA Paper 26451, University Library of Munich, Germany.
    2. Viceira, Luis & Campbell, John & White, Joshua, 2003. "Foreign Currency for Long-Term Investors," Scholarly Articles 3128708, Harvard University Department of Economics.
    3. Nicholas Barberis, 2000. "Investing for the Long Run when Returns Are Predictable," Journal of Finance, American Finance Association, vol. 55(1), pages 225-264, 02.
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