Exchange rate forecasting and the performance of currency portfolios

Jesus Crespo Cuaresma, Ines Fortin and Jaroslava Hlouskova
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Ines Fortin: Research Group Financial Markets and Econometrics, Institute for Advanced Studies

No 326, Economics Series from Institute for Advanced Studies

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.

Keywords: currency portfolios; exchange rate forecasting; trading strategies; profitability (search for similar items in EconPapers)
JEL-codes: E20 G02 G11 (search for similar items in EconPapers)
Pages: 64 pages
Date: 2017-01
New Economics Papers: this item is included in nep-for, nep-mac and nep-mon
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https://irihs.ihs.ac.at/id/eprint/4175 First version, 2017 (application/pdf)

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Journal Article: Exchange rate forecasting and the performance of currency portfolios (2018)
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