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Exchange rate forecasting and the performance of currency portfolios

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  • Crespo Cuaresma, Jesus

    (Vienna University of Economics and Business (WU), Austria Wittgenstein Centre for Demography and Global Human Capital (WIC), International Institute for Applied Systems Analysis (IIASA), Austrian Institute of Economic Research (WIFO))

  • Fortin, Ines

    (Research Group Financial Markets and Econometrics, Institute for Advanced Studies)

  • Hlouskova, Jaroslava

    (Research Group Financial Markets and Econometrics, Institute for Advanced Studies and Thompson Rivers University, Canada)

Abstract

We examine the potential gains of using exchange rate forecast models and forecast combination methods in the management of currency portfolios for three exchange rates, the euro (EUR) versus the US dollar (USD), the British pound (GBP) and the Japanese yen (JPY). We use a battery of econometric specifications to evaluate whether optimal currency portfolios implied by trading strategies based on exchange rate forecasts outperform single-currency and the equally weighted portfolio. We assess the differences in profitability of optimal currency portfolios for different types of investor preferences, different trading strategies, different composite forecasts and different forecast horizons. Our results indicate that the benefits of integrating exchange rate forecasts from state-of-the-art econometric models in currency portfolios are sensitive to the trading strategy under consideration and vary strongly across prediction horizons.

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  • Crespo Cuaresma, Jesus & Fortin, Ines & Hlouskova, Jaroslava, 2017. "Exchange rate forecasting and the performance of currency portfolios," Economics Series 326, Institute for Advanced Studies.
    • Handle: RePEc:ihs:ihsesp:326
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    File URL: https://irihs.ihs.ac.at/id/eprint/4175
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    2. Gong, Yuting & Ma, Chao & Chen, Qiang, 2022. "Exchange rate dependence and economic fundamentals: A Copula-MIDAS approach," Journal of International Money and Finance, Elsevier, vol. 123(C).
    3. de Souza Vasconcelos, Camila & Hadad Júnior, Eli, 2023. "Forecasting exchange rate: A bibliometric and content analysis," International Review of Economics & Finance, Elsevier, vol. 83(C), pages 607-628.
    4. Aristidou, Chrystalleni & Lee, Kevin & Shields, Kalvinder, 2022. "Fundamentals, regimes and exchange rate forecasts: Insights from a meta exchange rate model," Journal of International Money and Finance, Elsevier, vol. 123(C).
    5. Souropanis, Ioannis & Vivian, Andrew, 2023. "Forecasting realized volatility with wavelet decomposition," Journal of Empirical Finance, Elsevier, vol. 74(C).

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    More about this item

    Keywords

    currency portfolios; exchange rate forecasting; trading strategies; profitability;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)

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