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An Empirical Study of Portfolio Selection for Optimally Hedged Portfolios

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  • C. J. Adcock

    (The University of Sheffield, UK)

Abstract

This paper reports a study into the performance of currency-hedged portfolios constructed using mean-variance optimization methods. The method is to carry out optimization relative to a benchmark portfolio, which consists of the real assets, and simultaneously to determine the optimal exposures to each currency future. This is done at various levels of risk along the efficient frontier. A study into a portfolio of international stock and bond indices viewed from a US Dollar perspective indicates that, for the period studied, optimal currency hedging has the potential to add value in terms of additional expected return and excess return on a risk-adjusted basis. The results also demonstrate the superiority of strategies in which the hedge ratio is optimally determined over those with a fixed hedge ratio.

Suggested Citation

  • C. J. Adcock, 2003. "An Empirical Study of Portfolio Selection for Optimally Hedged Portfolios," Multinational Finance Journal, Multinational Finance Journal, vol. 7(1-2), pages 85-106, March-Jun.
    • Handle: RePEc:mfj:journl:v:7:y:2003:i:1-2:p:85-106
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    References listed on IDEAS

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    Cited by:

    1. C. J. Adcock, 2005. "Exploiting skewness to build an optimal hedge fund with a currency overlay," The European Journal of Finance, Taylor & Francis Journals, vol. 11(5), pages 445-462.
    2. Darren Butterworth & Phil Holmes, 2005. "The Hedging Effectiveness of U.K. Stock Index Futures Contracts Using an Extended Mean Gini Approach: Evidence for the FTSE 100 and FTSE Mid250 Contracts," Multinational Finance Journal, Multinational Finance Journal, vol. 9(3-4), pages 131-160, September.

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    More about this item

    Keywords

    exchange rate risk; currency hedging; mean-variance optimization;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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