IDEAS home Printed from https://ideas.repec.org/a/bic/journl/v16y2016i2p81-94.html
   My bibliography  Save this article

Should pension funds hedge currency risk? The case of Poland

Author

Listed:
  • Radoslaw Kurach

    (Faculty of Economic Sciences, Wroclaw University of Economics, Wroclaw, Poland)

  • Daniel Papla

    (Faculty of Management, Information Systems and Finance, Wrocław University of Economics, Wrocław, Poland)

Abstract

In this study, we identify the optimal hedge ratio for mandatory pension funds, defining the optimum as the value that minimizes the portfolio variance in accordance with the social objective of the mandatory pension system. Unlike most previous studies, we apply a dynamic framework to account for a regular inflow of contributions and impose specific investment constraints that make the simulation more realistic. Our outcomes challenge the conventional knowledge concerning the need for currency hedging. We discover that in the case of Poland, shortening the currency positions is undesirable, as it amplifies the portfolio variance. Moreover, we provide evidence that pension funds should internationalize their portfolios even further to fully exploit the available diversification gains. Finally, the obtained simulation results are matched with real data. The comparison presented tends to beg the question of how to overcome the home bias phenomenon.

Suggested Citation

  • Radoslaw Kurach & Daniel Papla, 2016. "Should pension funds hedge currency risk? The case of Poland," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 16(2), pages 81-94.
    • Handle: RePEc:bic:journl:v:16:y:2016:i:2:p:81-94
    as

    Download full text from publisher

    File URL: http://www.tandfonline.com/doi/full/10.1080/1406099X.2016.1187429
    Download Restriction: no
    ---><---

    More about this item

    Keywords

    Pension funds; currency hedging; home bias; investment constraints;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

    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:bic:journl:v:16:y:2016:i:2:p:81-94. 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.

    We have no bibliographic references for this item. You can help adding them by using 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: Anna Zasova (email available below). General contact details of provider: https://edirc.repec.org/data/biceplv.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.