International diversification benefits with foreign exchange investment styles
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Author (Corporation)
Publication date
08/2014
Typ of student thesis
Course of study
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Type
01A - Journal article
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Editor (Corporation)
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Parent work
Review of Finance
Special issue
DOI of the original publication
Link
Series
Series number
Volume
18
Issue / Number
5
Pages / Duration
1847-1883
Patent number
Publisher / Publishing institution
Oxford University Press
Place of publication / Event location
Oxford
Edition
Version
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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.
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ISBN
ISSN
1572-3097
1875-824X
1875-824X
Language
English
Created during FHNW affiliation
No
Strategic action fields FHNW
Publication status
Published
Review
Peer review of the complete publication
Open access category
Closed
License
Citation
Kröncke, T., Schindler, F., & Schrimpf, A. (2014). International diversification benefits with foreign exchange investment styles. Review of Finance, 18(5), 1847–1883. https://doi.org/10.1093/rof/rft047