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Exchange rate forecasting and the performance of currency portfolios

Crespo Cuaresma, Jesus and Fortin, Ines and Hlouskova, Jaroslava (2018) Exchange rate forecasting and the performance of currency portfolios. Journal of Forecasting, 37 (5). pp. 519-540. ISSN 02776693

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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 versus the US dollar, the British pound, and the Japanese yen. We use a battery of econometric specifications to evaluate whether optimal currency portfolios implied by trading strategies based on exchange rate forecasts outperform single currencies and the equally weighted portfolio. We assess the differences in profitability of optimal currency portfolios for different types of investor preferences, two trading strategies, mean squared error-based composite forecasts, and different forecast horizons. Our results indicate that there are clear benefits of integrating exchange rate forecasts from state-of-the-art econometric models in currency portfolios. These benefits vary across investor preferences and prediction horizons but are rather similar across trading strategies.

Item Type: Article
Additional Information: Financial support from Österreichische Nationalbank (Anniversary Fund, Grant No. 16250).
Keywords: currency portfolios, exchange rate forecasting, profitability, trading strategies
Divisions: Departments > Volkswirtschaft > Makroökonomie
Version of the Document: Published
Variance from Published Version: None
Depositing User: Mohammad Al Hessan
Date Deposited: 03 Apr 2018 13:15
Last Modified: 09 Nov 2018 06:58
Related URLs:
FIDES Link: https://bach.wu.ac.at/d/research/results/85844/
URI: http://epub.wu.ac.at/id/eprint/6200

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