Correlation risk and international portfolio choice

Branger, Nicole; Mück, Matthias; Weisheit, Stefan

doi:10.1002/fut.21941

Cited by 4 publications

(4 citation statements)

References 69 publications

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“…Previous findings show that depending on the currency exchange rate correlations, foreign investors can benefit more than domestic investors from international trading. Branger, Muck, and Weisheit (2019) explain that correlations with the exchange rate can affect the utilities of foreign investors differently, while the impact of relationships between stocks can be symmetric. In that regard, Dwumfour and Addy (2019) found that only depreciation of the Ghana local currency against the U.S. dollar, but not against Britain Pounds or Euro, reduces the portfolio stock returns.…”

Section: International Portfolio Theory and Foreign Exchange Derivativesmentioning

confidence: 99%

“…Some authors have performed empirical studies to analyze the effect of hedging strategies with derivatives on firm value (Guay & Kothari, 2003;Bartram et al, 2011), or on portfolio allocation (Demange & Laroque, 1999;Branger et al, 2019). Findings have proved the negative effect of the lack of hedging practices on exchange rate exposure (Bhargava & Malhotra, 2007), suggesting that exchange rate exposure is negatively related to derivatives usage (Anderson et al, 2004).…”

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

Impact of Exchange Rate Derivatives on Stocks in Emerging Markets

Ponce

Castillo-Ramírez

Venegas-Martı́nez

2020

Journal of Business Economics and Management

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This paper investigates the effect of derivatives on the relationship between the foreign exchange rate and the stock market. A theoretical model is used to extend the understanding of that relationship. Also, the model is tested with an empirical analysis using the GMM strategy for the Mexican and Brazilian stock markets for the period 2007 to 2019. Findings reveal that in addition to the spot exchange rate, exchange rate futures explain the currency exposure, wherein the derivative effect is the most prominent. The result implies that both risk sources should be considered in the implementation of risk management or macroeconomic policy. The theoretical results are extended by applying them to international portfolio management, proposing a strategy to mitigate foreign exchange exposure with derivatives. This study contributes to the literature by explaining why the minimum variance hedge ratio plays an essential role in the foreign exchange rate and stock market nexus.

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Section: International Portfolio Theory and Foreign Exchange Derivativesmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Impact of Exchange Rate Derivatives on Stocks in Emerging Markets

Ponce

Castillo-Ramírez

Venegas-Martı́nez

2020

Journal of Business Economics and Management

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“…Combining multiple risky assets with poor inter-correlation can significantly reduce unsystematic risk [2]. It not only keeps the effective frontier of portfolio away from risk, but also enables investors with specific risk preferences to obtain more risk returns in the financial market [3]. Therefore, with the increasing maturity of the financial market, the majority of investors in order to obtain a better marginal return on capital and less risk, portfolio management has become an urgent issue for them to consider [4].…”

Section: Introductionmentioning

confidence: 99%

Portfolio Management for Multi-industry

Zhang¹

2023

HBEM

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In the financial field, portfolio management is an important measure in the direction of investment or hedging. This paper mainly focuses on the optimization for the portfolio composed of assets from five industries, which is education, banking, automobile manufacturing, parts industry and e-commerce, and considers the allocation of assets to optimize the returns. In this paper, five representative assets from these five industries are selected. The Markowitz efficient frontier is plotted by Monte-Carlo method, using the return data of assets. Then the portfolio is optimized by mean-variance analysis and the maximum Sharpe ratio portfolio as well as minimum variance portfolio can be calculated. Finally, this paper analyzes the performance of the two portfolios, considering the influence of individual assets on the portfolio weight, and uses the Fama-French three factor model to analyze the performance of the portfolio. The results show that PTAIY and PSO from parts manufacturing and education occupy a large proportion in the maximum Sharpe ratio portfolio as well as the minimum variance portfolio. The findings could help investors interested in these five areas.

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“…Arbitrage Pricing Theory), financial stability or risk management, time-varying volatilities and correlations matter (Embrechts et al , 2002; Andersen et al , 2007). For example, studies by Krishnan et al (2009), Driessen et al (2009) and Buss et al (2017) study the pricing of variance and correlation risk, and Branger et al (2018) study the effect of stochastic covariances on the behaviour of international investors.…”

Section: Introductionmentioning

confidence: 99%

Did Brexit change asset co-movements?

Saha¹,

Sen

Smith-Han³

et al. 2021

JFEP

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Purpose This paper aims to examine the impact of the Brexit referendum on the risk structure of financial asset prices. Co-movements are analysed using daily price returns of major stock and bond indices as well as commodities and exchange rates from June 2014 to June 2018. The authors used a multivariate GARCH model to study the dynamics of the conditional correlation matrix of asset returns. It was found that the conditional variances and correlations of assets spike on and after the Brexit referendum and then quickly revert to normal levels, suggesting that the effect of the referendum was transient rather than structural. The findings are of interest to investors as co-movements of financial assets can significantly impact financial portfolios and hedging strategies. Design/methodology/approach The authors used a multivariate GARCH model to study the dynamics of the conditional correlation matrix of asset returns. Findings It was found that the conditional variances and correlations of assets spike on and after the Brexit referendum and then quickly revert to normal levels, suggesting that the effect of the referendum was transient rather than structural. Research limitations/implications The findings are of interest to investors as co-movements of financial assets can significantly impact financial portfolios and hedging strategies. Originality/value To the best of the authors’ knowledge, research studying the underlying asset co-movements around Brexit does not exist.

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Correlation risk and international portfolio choice

Cited by 4 publications

References 69 publications

Impact of Exchange Rate Derivatives on Stocks in Emerging Markets

Impact of Exchange Rate Derivatives on Stocks in Emerging Markets

Portfolio Management for Multi-industry

Did Brexit change asset co-movements?

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