Exchange rate hedging for internationally diversified equity fortfolios : the perspective of Thai investor

Abstract

Even though many prior studies have confirmed the benefit of international portfolio diversification, most investors still concentrate their investment domestically. One reason for the home-bias problem in investment is the presence of an additional risk from investing abroad, the currency risk. In order to find out whether hedging exchange rate risk can lead to potential gain in international portfolio, over the period 2008 to 2011, we examined implementation of various hedging strategies on international equity portfolios investing in stock markets of developed countries and emerging countries in the viewpoint of Thai investors. We broadly divided our methodology which is an out of sample analysis into 4 steps. First, we used historical time series to estimate expected return and variance covariance matrices. Second, we used these matrices to construct equity portfolios. Third, we implemented various hedging strategies on the equity portfolios. Finally, we measured the results and test for performance improvements of the hedged portfolios. We found that the hedged stock portfolios in all cases have better performances than no hedging. Also, even though not all of the improvements in performances of our hedged portfolios are significant at the 5% level of significance, most of them are. Moreover, we found out that the full hedging is the best performing strategy in our study and the portfolios investing in developed countries have better performances than those investing in emerging countries.