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Currency Hedging and Siegel's Paradox: On Black's Universal Hedging Rule

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  • Solnik, Bruno

Abstract

In an international multicurrency context, with nonstochastic inflation, equilibrium asset pricing models dictate that all investors should hold a combination of their national risk-free bill and the world market portfolio partly hedged against currency risk. We show that the equilibrium hedge ratios are not universal and depend on investors' preferences and relative wealth. So-called universal hedging rules are devoid of solid theoretical underpinning and practical applicability. Copyright 1993 by Blackwell Publishing Ltd.

Suggested Citation

  • Solnik, Bruno, 1993. "Currency Hedging and Siegel's Paradox: On Black's Universal Hedging Rule," Review of International Economics, Wiley Blackwell, vol. 1(2), pages 180-187, June.
    • Handle: RePEc:bla:reviec:v:1:y:1993:i:2:p:180-87
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    Cited by:

    1. Walker, Eduardo, 2008. "Strategic currency hedging and global portfolio investments upside down," Journal of Business Research, Elsevier, vol. 61(6), pages 657-668, June.
    2. Lioui, Abraham & Poncet, Patrice, 2003. "International asset allocation: A new perspective," Journal of Banking & Finance, Elsevier, vol. 27(11), pages 2203-2230, November.
    3. Libo Yin & Liyan Han, 2015. "Hedging International Foreign Exchange Risks via Option Based Portfolio Insurance," Computational Economics, Springer;Society for Computational Economics, vol. 45(1), pages 151-181, January.
    4. Andreas Schüler, 2021. "Cross-border DCF valuation: discounting cash flows in foreign currency," Journal of Business Economics, Springer, vol. 91(5), pages 617-654, July.
    5. Lioui, Abraham & Poncet, Patrice, 2002. "Optimal currency risk hedging," Journal of International Money and Finance, Elsevier, vol. 21(2), pages 241-264, April.

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