Aims to examine the currency impact on return, risk and market correlations from the perspective of both dollar and non‐dollar‐based investments.
Monthly data on six stock index series and exchange rates from Financial Times Sources are used, covering the period 1988‐1997.
Finds that the impact of exchange rate on returns measured in the investor's currency is generally negative for all investor groups, and it raises return volatility above the level of local markets most of the time. The correlation of returns is, however, lower than that of the local returns.
The study reports little evidence of a forward hedge improving the return for investors, but the hedging does reduce volatility for four out of six investors.
Whereas past studies examining market correlations, the risk‐return outcome of international investment, and/or the impact of exchange rate movement on the risk‐return out come, have generally used dollar‐based investment, this paper uses both dollar‐ and non‐dollar‐based investments to determine whether these are any major differences in the way exchange rate affects investment outcomes and market correlations.
