Performance of Currency Hedging across Major Stock Markets under Different Constraints

The performances of currency hedging across major markets under different constraints are compared, using method of mean-variance portfolio selection. The test results show that the hedging performance changes in different economic areas. For instance, it performs better in European markets, especially when the investor has high risk appetite, but has not significant advantage in Asian markets, especially in Asian emerging markets. In addition, constraints imposed on currency hedging affects the performance significantly while the constraints on asset short sell does not. It is denoted in the test that no constraint in hedging position or the constraint is limited to total position does not affect the performance severely, while more strict constraints, such as keeping short position in each currency future account, will reduce hedging performance greatly.