Conditional currency hedging for international equity portfolio

Abstract

The given study focuses on international equity portfolios based in seven developed economies and examines whether conditional approach to unitary, universal, and minimum variance currency hedging outperforms the commonly used unconditional approach in terms of minimizing risk without compromising returns. Capturing the period from 1980 until 2016, the out-of-sample Sharpe ratio results reveal that for six out of seven observed countries the conditional approach outperforms the unconditional for all examined hedging strategies. The obtained results lack statistical significance, which can be attributed to inconsistent performance of conditional hedging during the global financial crisis, as well as the problems with the forecasting indicator and estimation errors in hedging weights. Yet, the study reveals a big potential of conditional currency hedging for equity investors and points toward the factors which can further improve the given strategy.