Forward exchange bias, hedging and the gains from international diversification of investment portfolios

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Original languageEnglish
Pages (from-to)159-170
Journal / PublicationJournal of International Money and Finance
Volume13
Issue number2
Publication statusPublished - Apr 1994

Abstract

The gains to the US investor from international diversification of investment portfolios are examined for portfolio strategies that hedge and strategies that do not hedge exchange rate risk via the interbank forward market. Using the Sharpe Performance Index and stochastic dominance as performance measures, almost all the unhedged strategies outperformed the hedged strategies for 1985-1988; the opposite held for 1981-1984. The results are explained by the biasedness of forward rates in predicting future spot rates. (JEL F30). © 1994.

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