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Dynamic currency hedging with non-Gaussianity and ambiguity.
- Source :
-
Quantitative Finance . Feb2024, Vol. 24 Issue 2, p305-327. 23p. - Publication Year :
- 2024
-
Abstract
- This paper introduces a non-Gaussian dynamic currency hedging strategy for globally diversified investors with ambiguity. It provides theoretical and empirical evidence that, under the stylized fact of non-Gaussianity of financial returns and for a given optimal portfolio, the investor-specific ambiguity can be estimated from historical asset returns without the need for additional exogenous information. Acknowledging non-Gaussianity, we compute an optimal ambiguity-adjusted mean-variance (dynamic) currency allocation. Next, we propose an extended filtered historical simulation that combines Monte Carlo simulation based on volatility clustering patterns with the semi-parametric non-normal return distribution from historical data. This simulation allows us to incorporate investor's ambiguity into a dynamic currency hedging strategy algorithm that can numerically optimize an arbitrary risk measure, such as the expected shortfall. The out-of-sample backtest demonstrates that, for globally diversified investors, the derived non-Gaussian dynamic currency hedging strategy is stable, robust, and highly risk reductive. It outperforms the benchmarks of constant hedging as well as static/dynamic hedging approaches with Gaussianity in terms of lower maximum drawdown and higher Sharpe and Sortino ratios, net of transaction costs. [ABSTRACT FROM AUTHOR]
Details
- Language :
- English
- ISSN :
- 14697688
- Volume :
- 24
- Issue :
- 2
- Database :
- Academic Search Index
- Journal :
- Quantitative Finance
- Publication Type :
- Academic Journal
- Accession number :
- 175415459
- Full Text :
- https://doi.org/10.1080/14697688.2023.2301419