When a developed-market investor buys emerging-market stocks, this investor may be justified not to hedge currency risk. Our analysis indicates that completely unhedged portfolios often perform better than fully hedged portfolios and are not significantly inferior to optimally hedged portfolios....

As highlighted by recent literature, long-term foreign exchange risk premia (FRP) of a currency pair tend to covary negatively with short-term real interest rates differentials (RIRD) of the pair. We fit an affine term structure model for 9 major currencies against the US dollar and estimate two...