Working Paper: NBER ID: w29082
Authors: Clemens Sialm; Qifei Zhu
Abstract: Investments in international fixed income securities are exposed to significant currency risks. We collect novel data on mutual fund currency derivatives and document that around 90% of U.S. international fixed income funds use currency forwards to manage their foreign exchange exposure. Funds' currency forward positions differ substantially based on risk management demands related to portfolio currency exposures, return-enhancement motives such as currency momentum and carry trade, and strategic considerations related to past performance and fund clienteles. Funds that hedge their currency risk exhibit lower return variability, but do not generate inferior abnormal returns.
Keywords: No keywords provided
JEL Codes: F21; F31; F34; G11; G12; G13; G15; G23; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| currency forward usage (F31) | fund performance (G14) |
| currency hedging (F31) | return variability (C29) |
| lower currency exposure (F31) | higher returns (G12) |
| currency forward sales (F31) | concentration of foreign currencies (F31) |
| economic uncertainty (D89) | hedging behavior (G41) |
| past currency returns (G12) | forward positions (F23) |
| interest differentials (E43) | future currency returns (F31) |