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Empirical Test of the Efficiency of Currency Investments

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Listed:
  • Svend Reuse
  • Martin Svoboda

Abstract

The portfolio theory and the basic ideas of Markowitz can be applied to currency investments as well as to classical asset classes as shares or bonds. The question whether currency investments can be treated as efficient asset classes is not finally answered in theory and practice. This article applies a modified historical simulation approach to shares, bonds and currencies. The questions according to the efficiency of currency investments are answered empirically from a euro-investor´s point of view. The empirical analysis leads to the result that currency investments are not efficient in general. Some specific cases exist. The used data lead to the result that the Czech koruna seems to be an efficient asset class and leveraging a euro portfolio by other currencies is useful as well. But it has to be doubted if these effects will remain in the future.

Suggested Citation

  • Svend Reuse & Martin Svoboda, 2011. "Empirical Test of the Efficiency of Currency Investments," Prague Economic Papers, University of Economics, Prague, vol. 2011(2), pages 99-119.
  • Handle: RePEc:prg:jnlpep:v:2011:y:2011:i:2:id:391:p:99-119
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    References listed on IDEAS

    as
    1. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    2. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
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    More about this item

    Keywords

    portfolio theory; financial crisis; historical simulation; currency investment; leveraging by currencies;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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