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That Courage is not inconsistent with Caution: Foreign Currency Hedging for Superannuation Funds

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Author Info
Susan Thorp

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Abstract

Surveys of Australian superannuation funds verify that most international bond holdings, but not equity holdings, are hedged for currency risk. We compare the mean-variance efficiency of this practice with two alternative strategies: a conventional forward hedge; and a selective hedge triggered by the sign of the interest differential. These strategies produce optimal allocations which stochastically dominate the restricted portfolio according to Barrett-Donald (2003) tests. The advantages of alternative hedging strategies remain when the vector of sample mean returns is replaced by forecasts. Selective hedging works best for equities; conventional hedging for bonds. Adding unhedged bonds does not improve outcomes

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Paper provided by Econometric Society in its series Econometric Society 2004 Australasian Meetings with number 148.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:ausm04:148

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Related research
Keywords: currency hedging portfolio allocation stochastic dominance

Find related papers by JEL classification:
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
G23 - Financial Economics - - Financial Institutions and Services - - - Pension Funds; Other Private Financial Institutions

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  17. Glen, Jack & Jorion, Philippe, 1993. " Currency Hedging for International Portfolios," Journal of Finance, American Finance Association, vol. 48(5), pages 1865-86, December. [Downloadable!] (restricted)
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