Online Appendix: International Diversification Benefits with Foreign Exchange Investment Styles
40 Pages Posted: 18 Dec 2012
Date Written: December 14, 2012
This document contains supporting material for the following article: Tim Kroencke, Felix Schindler and Andreas Schrimpf (2012), "International Diversification Benefits with Foreign Exchange Investment Styles".
This paper studies portfolio choice with popular foreign exchange (FX) investment styles such as carry trades, FX momentum and FX value strategies. We go beyond the benefits from hedging to shed more light on the speculative component of currency investments. In particular, we are interested in the magnitude of diversification benefits due to the style-based management of the currency component of well-diversified international portfolios. Our results suggest that FX investment styles generate significant improvements in the asset allocation. These findings hold after taking into account transaction costs and when controlling for the FX risk inherent in the benchmark assets. Importantly, these results are also confirmed in an extensive out-of-sample experiment mimicking investor decisions in real-time.
The paper "International Diversification Benefits with Foreign Exchange Investment Styles" to which these Appendices apply is available at the following URL: http://ssrn.com/abstract=1790764
Keywords: International Diversification, Foreign Exchange Speculation and Hedging, Carry Trades, Stochastic Dominance, Investment Styles
JEL Classification: F31, G12, G15
Suggested Citation: Suggested Citation