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Optimal combination of currency strategies

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  • Laborda, Ricardo

Abstract

This paper handles the portfolio problem of combining optimally different currency strategies in the presence of return predictability. After transaction costs, our in-sample and out-of-sample empirical results confirm the relevance of considering state variables like FX volatility and the CRB industrial return or yield curve related variables to accurately time the currency carry trade and the dollar carry trade. An optimal combination of currency strategies and the use of risk management of the optimal portfolios also allows the investor to increase their Sharpe ratio and certainty equivalent, compared to an optimal portfolio of traditional assets.

Suggested Citation

  • Laborda, Ricardo, 2018. "Optimal combination of currency strategies," The North American Journal of Economics and Finance, Elsevier, vol. 43(C), pages 129-140.
    • Handle: RePEc:eee:ecofin:v:43:y:2018:i:c:p:129-140
    DOI: 10.1016/j.najef.2017.10.010
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    More about this item

    Keywords

    Currency style investing; Optimal combination; Currency predictability;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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