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Business cycle variations in exchange rate correlations: Revisiting global currency hedging

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  • de Boer, Jantke
  • Bövers, Kim J.
  • Meyer, Steffen

Abstract

We revisit the main findings of Campbell et al. (2010) and Schmittmann (2010) covering an extended period from 1975 to 2016 and add a business cycle split. While we can confirm most of the results in the extended sample period, the role of the euro as a reserve currency vanishes during the financial crisis. The business cycle split shows there are differences in optimal hedge ratios between expansions and recessions for the euro and the other currencies investigated. These unstable correlations between asset returns and exchange rates should be considered carefully when aiming at volatility-minimizing hedge ratios of international investments.

Suggested Citation

  • de Boer, Jantke & Bövers, Kim J. & Meyer, Steffen, 2020. "Business cycle variations in exchange rate correlations: Revisiting global currency hedging," Finance Research Letters, Elsevier, vol. 33(C).
    • Handle: RePEc:eee:finlet:v:33:y:2020:i:c:s1544612318304161
    DOI: 10.1016/j.frl.2019.05.013
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    References listed on IDEAS

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    1. John Y. Campbell & Karine Serfaty‐De Medeiros & Luis M. Viceira, 2010. "Global Currency Hedging," Journal of Finance, American Finance Association, vol. 65(1), pages 87-121, February.
    2. repec:bla:jfinan:v:43:y:1988:i:1:p:197-215 is not listed on IDEAS
    3. Jochen M. Schmittmann, 2010. "Currency Hedging for International Portfolios," IMF Working Papers 2010/151, International Monetary Fund.
    4. Glen, Jack & Jorion, Philippe, 1993. "Currency Hedging for International Portfolios," Journal of Finance, American Finance Association, vol. 48(5), pages 1865-1886, December.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Pagnottoni, Paolo & Spelta, Alessandro, 2024. "Hedging global currency risk: A dynamic machine learning approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 649(C).
    2. Zuzana Rowland & George Lazaroiu & Ivana Podhorská, 2020. "Use of Neural Networks to Accommodate Seasonal Fluctuations When Equalizing Time Series for the CZK/RMB Exchange Rate," Risks, MDPI, vol. 9(1), pages 1-21, December.

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    More about this item

    Keywords

    Currency hedging; International investments; Currency risk;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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