We develop a novel method to dynamically hedge foreign exchange exposure in international equity and bond portfolios. The method exploits the time-series predictability of currency returns, which we show emerges from exploiting a forecastable component in global factor returns. The hedging...

Using a measure of global political risk, relative to the U.S., that captures unexpected political conditions, we show that political risk is priced in the cross section of currency momentum and contains information beyond other risk factors. Our results are robust after controlling for...

We test the role of funding-constrained investors across developed financial markets. We compile direct measures of the severity of funding frictions, or illiquidity, from deviations of government bond yields from a fitted yield curve. Using these illiquidity measures, we first show that higher...

This paper addresses the question of optimal currency exposure for a risk-and-ambiguity-avers international investor. A robust mean-variance model with smooth ambiguity preferences is used to derive the optimal currency exposure. In the theoretical part, we show that the sample-efficient...

Classical financial market theories built upon the assumption of a perfect market have been coping with frictions on both developed and emerging markets. There are numerous factors affecting the operation of financial markets and their participants’ behavior, but illiquidity is a continuous...

This paper introduces an alternate measure of idiosyncratic risk leveraged from the decomposition method to further eliminate the residual systematic risk inherent in the factor asset pricing model. Combining both complementary techniques contributes to a more comprehensive firm-level...

Typically smaller and less developed than their better-known emerging market (EM) counterparts, frontier market (FM) countries offer attractive long-term growth and diversification potential. However, investors must balance these possible rewards against a host of risks and challenges endemic to...

Are frontier markets the next emerging markets? And if so, should global equity investors include them in their portfolios? From a risk parity perspective, investors could benefit from a frontier markets allocation well in excess of the market weight of the asset class. A risk parity portfolio...

In the course of eurozone exit, the underlying stocks of American Depositary Receipts (ADRs) would be redenominated from euros into the new national currency. We exploit ADR investors' exposure to currency redenomination losses to derive a novel measure of eurozone exit risk. We find that while...

We study the role of international financial integration in buffering natural disaster shocks, using a large sample of advanced and emerging economies. Conditioning on such exogenous events addresses the endogeneity between financial structures and economic conditions. We document that...