Work

International Diversification Benefits with Foreign Exchange Investment Styles

Year: 2013

Type: article

Abstract: Style-based management of the foreign exchange (FX) component of international investments with carry trade, FX momentum, and FX value strategies provides economically large and significant diversification benefits. These speculative benefits go beyond the hedging benefits of FX risk documented in the earlier literature. Our results hold after transaction costs and are confirmed in an extensive out-of-sample experiment mimicking investor decisions in real time. Adding a composite FX style portfolio to diversified allocations of global bonds and stocks leads to a 64% increase in the out-of-sample Sharpe ratio from 0.64 to 1.05, without adverse impact on other portfolio characteristics such as skewness.

Source: European Finance Review

DOI: 10.1093/rof/rft047

Authors: Tim A. Kroencke, Felix Schindler, Andreas Schrimpf

Institutions: Centre for European Economic Research, University of Mannheim, Aarhus University, Steinbeis University Berlin

Language: English

Topic: Financial Markets and Investment Strategies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

Funders: Samfund og Erhverv, Det Frie Forskningsråd, National Research Foundation, Danmarks Grundforskningsfond

OpenAlex ID: W2745168488

FWCI: 9.912

Cites: 78

Cited by: 102

Related to: 10