Business cycle variations in exchange rate correlations: Revisiting global currency hedging

Abstract

We revisit the main findings of Campbell et al. (2010) and Schmittmann (2010) covering an extended period from 1975 to 2016 and add a business cycle split. While we can confirm most of the results in the extended sample period, the role of the euro as a reserve currency vanishes during the financial crisis. The business cycle split shows there are differences in optimal hedge ratios between expansions and recessions for the euro and the other currencies investigated. These unstable correlations between asset returns and exchange rates should be considered carefully when aiming at volatility-minimizing hedge ratios of international investments.