HEDGING POLICIES IN RECENT TIMES: AN ANALYSIS OF EUROPEAN EMERGING MARKETS DIVERSIFIED PORTFOLIOS

Our paper assesses the contribution of exchange rate volatility to the total volatility of an investment made by an US investor in emerging countries from the European Union. Moreover, we undertake a comparative analysis between the performances of fully hedged versus fully unhedged portfolios. More specifically, we derive efficient frontiers for both hedged and unhedged portfolios diversified among US and European emerging markets stocks. The purpose of this paper is to give an insight on currency exposure and hedging policies in recent times for a US investor, so the period taken into consideration is January 2013-December 2015. Moreover, by comparing the currency movement exposure and the performance of different hedging policies in the last three years versus the Global Financial Crisis and pre-crisis periods, characterized by different global macroeconomic developments and financial markets evolutions, we want to emphasize the trend in hedging policies during recession times and to compare the optimal hedging policy in normal versus financial turbulent periods. We consider as the pre-crisis period the period between August 2005 and July 2007 and as the crisis period the period between August 2007 and April 2009. The main findings of the paper indicate that hedged portfolios outperform the unhedged ones for high values of risk, when the pre-crisis period is taken into consideration. The period of high turbulences during the Global Financial Crisis reveals a different behaviour of portfolios diversified among US and European emerging markets stocks, the results indicating that the unhedged portfolios outperform the hedged ones, for moderate and high values of risk. In the recent period, during January 2013 and December 2015, we deal with a mix in optimal hedging policies. For very low values of risk, the unhedged portfolios outperform the hedged ones. For moderate values of risk, the US investor obtains a slightly higher return for hedged and unhedged portfolios. Therefore, the optimal hedging policy clearly changes over time. Hedging currency risk is a better option for the US investor when taking into consideration the pre-crisis period, while letting the diversified portfolio unhedged in times of crisis and in recent times, in the last three years, is more profitable in terms of returns.