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Benchmarking and Currency Risk

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  • Massa, Massimo
  • Wang, Yanbo
  • Zhang, Hong

Abstract

We show that the currency risk embedded in the benchmarks of international mutual funds negatively affects fund performance. More specifically, a high benchmark-implied currency risk induces funds to invest in markets with less volatile currencies, leading to a higher degree of currency concentration in portfolio holdings. This currency concentration, however, departs from the optimal equity allocation strategy across countries and reduces fund performance. We document that funds resorting to high currency concentrations underperform funds with low currency concentrations by as much as 1%–2% per year.

Suggested Citation

  • Massa, Massimo & Wang, Yanbo & Zhang, Hong, 2016. "Benchmarking and Currency Risk," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 51(2), pages 629-654, April.
    • Handle: RePEc:cup:jfinqa:v:51:y:2016:i:02:p:629-654_00
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    Cited by:

    1. Anna Boldizsár & Zalán Kocsis & Zsuzsa Nagy-Kékesi & Gábor Sztanó, 2020. "FX Forward Market in Hungary: General Characteristics and Impact of the COVID Crisis," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 19(3), pages 5-51.
    2. Hoover, Gary A. & Smimou, K., 2023. "Socially conscious investment funds and home country institutions," Economic Analysis and Policy, Elsevier, vol. 79(C), pages 395-417.

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