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Impact of investment horizon on currency portfolio diversification

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  • Tang, Gordon Y. N.

Abstract

International managers need to manage foreign exchange rate risks effectively in order to maximize the value of the firm. Modern portfolio theory suggests that exchange rate risks can be reduced through currency portfolio diversification. However, little attention has been paid in the literature to the impact of different investment horizons on the effectiveness of currency portfolio diversification. The information is important to international managers in planning their future holding intervals of currency portfolios. This paper provides empirical results on this topic using 13 countries' exchange prices as to the Hong Kong dollar. Our results show that with an increase in the investment horizon, the correlations between currency returns increase in general, causing the benefits of diversification to decrease. The results suggest that a delayed adjustment pattern exists among different currencies; however, the patterns are different for different currencies.

Suggested Citation

  • Tang, Gordon Y. N., 1996. "Impact of investment horizon on currency portfolio diversification," International Business Review, Elsevier, vol. 5(1), pages 99-116, February.
    • Handle: RePEc:eee:iburev:v:5:y:1996:i:1:p:99-116
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    References listed on IDEAS

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    1. Levy, Haim & Sarnat, Marshall, 1970. "International Diversification of Investment Portfolios," American Economic Review, American Economic Association, vol. 60(4), pages 668-675, September.
    2. Levy, Haim, 1981. "Optimal Portfolio of Foreign Currencies with Borrowing and Lending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 13(3), pages 325-341, August.
    3. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    4. Atchison, Michael D & Butler, Kirt C & Simonds, Richard R, 1987. "Nonsynchronous Security Trading and Market Index Autocorrelation," Journal of Finance, American Finance Association, vol. 42(1), pages 111-118, March.
    5. Eun, Cheol S & Resnick, Bruce G, 1988. " Exchange Rate Uncertainty, Forward Contracts, and International Portfolio Selection," Journal of Finance, American Finance Association, vol. 43(1), pages 197-215, March.
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    Cited by:

    1. Jea, Rong & Lin, Jin-Lung & Su, Chao-Ton, 2005. "Correlation and the time interval in multiple regression models," European Journal of Operational Research, Elsevier, vol. 162(2), pages 433-441, April.

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