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Currency hedging strategies in strategic benchmarks and the global and Euro sovereign financial crises

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  • Caporin, Massimiliano
  • Jimenez-Martin, Juan-Angel
  • Gonzalez-Serrano, Lydia

Abstract

This paper investigates dynamic currency hedging benefits, with a further focus on the impact of currency hedging before and during the recent financial crises originated from the subprime and the Euro sovereign bonds. We take the point of view of a Euro-based institutional investor who considers passive investment strategies in portfolios holding Euro-denominated and non-Euro (foreign) assets. We analyze the impact of the model specification to improve the risk-return trade-off when currency risk is hedged. Hedging strategies of currency risk, using exchange rate futures and driven by several multivariate GARCH models, depend on the portfolio composition and period analyzed. Dynamic covariance models provide limited evidences of a decrease in hedging ratios compared to naïve hedging strategies based on linear regressions or variance smoothing. Nevertheless, those results are coupled with better performances of dynamic covariance models in terms of hedging effectiveness and improved Sharpe ratios.

Suggested Citation

  • Caporin, Massimiliano & Jimenez-Martin, Juan-Angel & Gonzalez-Serrano, Lydia, 2014. "Currency hedging strategies in strategic benchmarks and the global and Euro sovereign financial crises," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 31(C), pages 159-177.
  • Handle: RePEc:eee:intfin:v:31:y:2014:i:c:p:159-177
    DOI: 10.1016/j.intfin.2014.03.015
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Bessler, Wolfgang & Wolff, Dominik, 2014. "Hedging European government bond portfolios during the recent sovereign debt crisis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 33(C), pages 379-399.
    2. Kotkatvuori-Örnberg, Juha, 2016. "Dynamic conditional copula correlation and optimal hedge ratios with currency futures," International Review of Financial Analysis, Elsevier, vol. 47(C), pages 60-69.

    More about this item

    Keywords

    Multivariate GARCH; Conditional correlations; Currency futures; Optimal hedge ratios; Hedging strategies;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G01 - Financial Economics - - General - - - Financial Crises
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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