This paper tests whether hedging currency risk improves the performance of international stock portfolios. We use a generalized performance measure which allows for investor-dependencies such as different utility functions and the presence of nontraded risks. In addition we show that an auxiliary regression, similar to the Jensen regression, provides a wealth of information about the optimal portfolio holdings for investors for the non mean-variance case. This is analogous to the information provided by the Jensen regression about optimal portfolio holdings for the mean-variance case. Our empirical results show that static hedging with currency forwards does not lead to improvements in portfolio performance for a US investor that holds a stock portfolio from the G5 countries. On the other hand, hedges that are conditional on the current interest rate spread do lead to significant performance improvements. Also, when an investor has a substantial exogenous exposure to one of the currencies, currency hedging clearly improves his portfolio performance. While these results hold for investors with power utility as well as with mean-variance utility functions, the optimal hedge ratios for these investors are different.

currency risk, forwards, hedging, international asset pricing, portfolio choice
Corporate Finance and Governance (jel G3), Capital Budgeting; Investment Policy (jel G31), Business Administration and Business Economics; Marketing; Accounting (jel M)
Erasmus Research Institute of Management
ERIM Report Series Research in Management
Copyright 2000, F.A. de Roon, T.E. Nijman, B.J.M. Werker, This report in the ERIM Report Series Research in Management is intended as a means to communicate the results of recent research to academic colleagues and other interested parties. All reports are considered as preliminary and subject to possibly major revisions. This applies equally to opinions expressed, theories developed, and data used. Therefore, comments and suggestions are welcome and should be directed to the authors.
Erasmus Research Institute of Management

de Roon, F.A, Nijman, T.E, & Werker, B.J.M. (2000). Currency Hedging for International Stock Portfolios (No. ERS-2000-21-F&A). ERIM Report Series Research in Management. Erasmus Research Institute of Management. Retrieved from