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 appendices for this paper are available at the following URL: "http://ssrn.com/abstract=2189886" http://ssrn.com/abstract=2189886