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Internationally Diversified Bond Portfolios: The Merits of Active Currency Risk Management

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  • Richard M. Levich
  • Lee R. Thomas
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    Abstract

    A new statistical procedure is used to test for weak form efficiency in the foreign exchange futures markets. Using daily currency futures prices for the 1976-1990 period, we conclude that successive exchange rate changes have not been independent We examine the implications of this finding for two groups of investors: (1) return seeking investors considering foreign exchange as a separate asset class; (2) international portfolio investors deciding whether or not to currency hedge the foreign exchange rate exposures embedded in their non-dollar investments. Using the currency futures data and monthly data on 10-year dollar and non-dollar bonds, we conclude that active currency risk management, based on a simple application of technical trading signals, can substantially improve the risk-return opportunities for both groups of investors in comparison to passive currency strategies.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4340.

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    Date of creation: Apr 1993
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    Publication status: published as Financial Analysts Journal, vol. 49, 1993, pp.63-70.
    Handle: RePEc:nbr:nberwo:4340

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    1. Black, Fischer, 1990. " Equilibrium Exchange Rate Hedging," Journal of Finance, American Finance Association, vol. 45(3), pages 899-907, July.
    2. Richard M. Levich & Lee R. Thomas, 1991. "The Significance of Technical Trading-Rule Profits in the Foreign Exchange Market: A Bootstrap Approach," NBER Working Papers 3818, National Bureau of Economic Research, Inc.
    3. Froot, Kenneth A & Thaler, Richard H, 1990. "Foreign Exchange," Journal of Economic Perspectives, American Economic Association, vol. 4(3), pages 179-92, Summer.
    4. Sweeney, Richard J, 1986. " Beating the Foreign Exchange Market," Journal of Finance, American Finance Association, vol. 41(1), pages 163-82, March.
    5. Jorion, Philippe, 1990. "The Exchange-Rate Exposure of U.S. Multinationals," The Journal of Business, University of Chicago Press, vol. 63(3), pages 331-45, July.
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    Cited by:
    1. Peter A. Abken & Milind M. Shirkhande, 1997. "The role of currency derivatives in internationally diversified portfolios," Economic Review, Federal Reserve Bank of Atlanta, issue Q 3, pages 34-59.
    2. Luis Berggrun, 2005. "Currency Hedging for a Dutch Investor: The Case of Pension Funds and Insurers," DNB Working Papers 054, Netherlands Central Bank, Research Department.

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