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Country-Based Investing with Exchange Rate and Reserve Currency

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  • Galvani, Valentina

    (University of Alberta, Department of Economics)

Abstract

This study examines how style investing impacts correlations in a small and large economy, with exchange rate risk, and a reserve currency. The results show that style investing increases correlations in both economies, but more so in the smaller market. The impact of style investing on either country's correlations depends nonlinearly on the volatility of the exchange rate and the strength of the reserve currency effect. Higher levels of risk aversion amplify the impact of style investing on correlations. Imprecise signals and country preferences increase correlation distortions. The results have risk management implications for portfolio diversification.

Suggested Citation

  • Galvani, Valentina, 2022. "Country-Based Investing with Exchange Rate and Reserve Currency," Working Papers 2022-5, University of Alberta, Department of Economics.
    • Handle: RePEc:ris:albaec:2022_005
    as

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    File URL: https://sites.ualberta.ca/~econwps/2022/wp2022-05.pdf
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    More about this item

    Keywords

    Style investing; International Markets; Portfolio Diversification; Return Correlations; International Markets;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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