International portfolios and currency hedging: viewpoint of Polish investors

Abstract

PurposeThe purpose of this paper is to empirically examine the benefits of international equity portfolios from the viewpoint of Polish investors.Design/methodology/approachEight national stock markets are included in the sample and three different portfolio forming strategies – Equally‐Weighted Portfolio (EWP), Minimum Variance Portfolio (MVP) and Tangency Portfolio (TP) – are adopted to construct the international diversified portfolios. In order to reveal the impact of currency hedging, the performance of a non‐hedged versus a fully‐hedged strategy is estimated. Finally, for comparison purpose, performances of the international portfolios from US investors' perspective are also examined.FindingsUsing monthly data from 1999 to 2008, the results show that from an ex post basis, an equally‐weighted global portfolio offers risk reduction opportunities for Polish investors and performance improvement potentials for US investors. In addition, US investors seem to fare better leaving their foreign investment unhedged, while Polish investors benefit from currency hedging. However, ex ante analysis reveals that when short‐selling is allowed, TP outperforms other portfolios and the risk‐adjusted portfolio performance could be enhanced by currency hedging.Originality/valueIn summary, the ex post analysis suggests that global portfolio either reduces risk or improves return. Compared to the domestic portfolio, the international portfolio reduces the portfolio risk while maintaining certain level of portfolio return for Polish investors who experience unusual high volatility in domestic market. On the other hand, an international portfolio yields higher portfolio return with similar risk level, as compared to the domestic portfolio, for US investors who suffer losses in the domestic market. A full currency hedging strategy benefits Polish but not US investors. Hedging or not, the risk of the local stock market is the major contributor to the risk of the equally‐weighted portfolio for both Polish and US investors.