Correlation Risk and International Portfolio Choice

Faculty/Professorship: Banking and Financial Control  
Author(s): Branger, Nicole; Muck, Matthias ; Weisheit, Stefan
Title of the Journal: The journal of futures markets
ISSN: 0270-7314
Publisher Information: Wiley-Blackwell : Hoboken, NJ
Year of publication: 2019
Volume: 39
Issue: 1. First published: 05 July 2018
Pages: 128-146
Language(s): English
DOI: 10.1002/fut.21941
Variance‐covariance risk of the exchange rate is highly relevant for international investors. This paper addresses optimal asset allocation with stochastic variances and covariances in a Wishart Affine Stochastic Correlation (WASC) model in incomplete and complete markets. We show that the (hedging) demand for exchange rate variance‐covariance risk can differ significantly between international investors. Local correlations with the exchange rate can affect the utilities of international investors differently while the impact of correlations between stocks can be symmetric. Depending on the current local exchange rate correlations domestic investors can benefit more or less than foreign investors from international trading.
Keywords: international asset allocation, stochastic correlation, Wishart processes, dynamic trading strategies, derivatives
Peer Reviewed: Ja
International Distribution: Ja
Type: Article
Year of publication: 20. July 2018