Global currency hedging with ambiguity
研究同时厌恶风险和模糊性的国际投资者如何优化货币配置，发现模糊性会提高对冲需求，并改善投资组合的稳定性与波动率。
This paper examines the issue of optimal currency allocation for an international investor who is both risk- and ambiguity-averse. Utilizing a robust mean–variance model that incorporates smooth ambiguity preferences, we derive a closed-form solution for the optimal currency exposure. Within this theoretical framework, the demand for optimal currency hedging is formulated as the solution to a generalized ridge regression. Our findings indicate that the investor’s aversion to model uncertainty increases the demand for hedging. The empirical analysis illustrates that ambiguity introduces greater estimation bias and narrows the confidence interval of the optimal currency exposure estimator. An out-of-sample backtest further demonstrates that incorporating ambiguity into the model improves the stability of optimal currency allocation over time and significantly reduces portfolio volatility after accounting for transaction costs.