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| Type | Conference Presentation |
| Scope | Discipline-based scholarship |
| Title | Optimal Currency Exposure Under Risk and Ambiguity Aversion |
| Organization Unit | |
| Authors |
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| Presentation Type | speech |
| Item Subtype | Original Work |
| Refereed | Yes |
| Status | Published electronically before print/final form (Epub ahead of print) |
| Language |
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| Event Title | SFI Research Days |
| Event Type | conference |
| Event Location | Gerzensee |
| Event Start Date | June 2 - 2019 |
| Event End Date | June 4 - 2019 |
| Abstract Text | The choice of optimal currency exposure for a risk and ambiguity averse international investor is derived and studied. Robust mean-variance preferences, explicitly capturing investor’s dislike for model uncertainty, are used in order to derive the model-free optimal currency exposure in the presence of both risk and ambiguity aversion. Additionally, we show that the sample efficient currency demand is found as a vector of generalized ridge regression coefficients of fully hedged portfolio returns on excess currency returns, where the model uncertainty corresponds to the penalty term in the regression. The empirical analysis of the currency hedging strategy is conducted using the foreign exchange, stock, and bond returns over the period 1999 to 2018. We find that the proposed hedging strategy leads to significant improvements of the portfolio performance and examine the effect of model uncertainty on equilibrium currency allocations. |
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