Internationally Diversified Bond Portfolios: The Merits of Active Currency Risk Management
AbstractA 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 InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4340.
Date of creation: Apr 1993
Date of revision:
Publication status: published as Financial Analysts Journal, vol. 49, 1993, pp.63-70.
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Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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Find related papers by JEL classification:
- G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
- F31 - International Economics - - International Finance - - - Foreign Exchange
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- 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.
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- 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.
- 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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