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N°121 |
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| Issue 1 2010 |
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| The Introduction of Emerging Currencies into a Portfolio: Towards a more Complete Diversification Model |
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Stéphanie Prat
Sophie Brana |
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| We have drawn on portfolio theory and international diversification in order to analyse strategies that help reduce emerging economy exposure to exchange-rate risk. We show that it may be efficient for an investor, by taking into account the several components of the global risk, to build up a portfolio of emerging-country assets denominated in local currency - unhedged against currency risk - compared with a strategy that includes emergingcountry securities denominated in foreign currencies. This strategy would lead to a reduction in the “original sin” (i. e. the inability of emerging economies to borrow in local currency), and de facto to a reduction in currency mismatches in balance sheets of emerging economies. |
Abstract
Full Text |
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| International Portfolio Diversification; Original Sin; Emerging Countries; Downside Risk |
Keywords |
| G11; E44; F34 |
JEL classification |
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