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Global Currency Hedging

Authors

  • JOHN Y. CAMPBELL,

  • KARINE SERFATY-DE MEDEIROS,

  • LUIS M. VICEIRA

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    • Campbell is from the Department of Economics, Harvard University, and NBER. Serfaty-de Medeiros is from OC&C Strategy Consultants. Viceira is from Harvard Business School, NBER, and CEPR. Viceira acknowledges the financial support of the Division of Research of the Harvard Business School. We are grateful to Anna Milanez and Johnny Kang for research assistance, and to Cam Harvey (the editor), an anonymous referee, Roderick Molenaar, Sam Thompson, Tuomo Vuolteenaho, and seminar participants at Brandeis University, Boston University, the University of Illinois at Urbana-Champaign, Harvard University, and the Stockholm School of Economics for comments and suggestions.


ABSTRACT

Over the period 1975 to 2005, the U.S. dollar (particularly in relation to the Canadian dollar), the euro, and the Swiss franc (particularly in the second half of the period) moved against world equity markets. Thus, these currencies should be attractive to risk-minimizing global equity investors despite their low average returns. The risk-minimizing currency strategy for a global bond investor is close to a full currency hedge, with a modest long position in the U.S. dollar. There is little evidence that risk-minimizing investors should adjust their currency positions in response to movements in interest differentials.

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