Currency Hedging in Emerging Markets

Abstract

We study the effectiveness of currency hedging in emerging markets, focusing on portfolio performance employing both a minimum variance and a unitary hedging strategy. The perception is that the currency in emerging markets experience higher volatility than developed countries. We find that the minimum variance hedge significantly reduces the portfolio standard deviation for all countries, while the unitary hedge statistically increases portfolio standard deviation. We also find that periods of financial distress may cause large outliers for some countries. Implementing a conditional approach of the minimum variance hedge manage to reduce the vulnerability to large interest rates and currency fluctuations. We conclude that both applications of the minimum variance strategies are beneficial for investors in the emerging markets we investigate.