HEDGING CURRENCY RISK IN EUROPEAN STOCK MARKETS: EVIDENCE FROM THE CURRENT FINANCIAL CRISIS

2012

Our paper examines the impact of currency risk on investments made by a Euro based investor in European countries in normal versus turbulent times. We use unhedged and hedged stock market returns to see whether the performance of portfolios made up of stocks from developed markets could be enhanced by including stocks from emerging markets and hedging currency risk. The contribution of currency risk is highly fluctuating, but generally positive, indicating that currency risk adds to the local market risk. Hedging currency risk is a good choice when short-selling is allowed; however, the constraint of no short-selling alters this pattern.