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Active Currency Investing and Performance Benchmarks

Author

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  • Michael Melvin
  • Duncan Shand

Abstract

There are no established benchmarks for evaluating currency investment manager performance. Some analysts have suggested that known investing styles like momentum, purchasing power parity, and carry serve as benchmarks. Challenges for this approach include: there is no market portfolio; there are many alternative generic factor constructions; different constructions of the same factor may have low correlations; the 3 factors may not provide diversification; and there is no “buy and hold” in the FX market. An evaluation of professional currency managers’ returns indicates that they are often generated independently from the generic style factors. Skill in timing is what investors should pay for and some managers demonstrate superior skill in timing the factors. Managers are also skilled at minimizing drawdowns relative to the generic factors. The use of generic style factors may be a worst case scenario instead of returns to which an FX investor may aspire.

Suggested Citation

  • Michael Melvin & Duncan Shand, 2010. "Active Currency Investing and Performance Benchmarks," CESifo Working Paper Series 3052, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_3052
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    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp3052.pdf
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    References listed on IDEAS

    as
    1. Melvin, Michael & Taylor, Mark P., 2009. "The crisis in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 28(8), pages 1317-1330, December.
    2. Lukas Menkhoff & Mark P. Taylor, 2007. "The Obstinate Passion of Foreign Exchange Professionals: Technical Analysis," Journal of Economic Literature, American Economic Association, vol. 45(4), pages 936-972, December.
    3. Momtchil Pojarliev & Richard M. Levich, 2007. "Do Professional Currency Managers Beat the Benchmark?," NBER Working Papers 13714, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Menkhoff, Lukas & Sarno, Lucio & Schmeling, Maik & Schrimpf, Andreas, 2012. "Currency momentum strategies," Journal of Financial Economics, Elsevier, vol. 106(3), pages 660-684.

    More about this item

    Keywords

    currency investing; performance benchmarks; carry; momentum; purchasing power parity;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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