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Interest-Rate Arbitrage in Currency Baskets: Forecasting Weights and Measuring Risk

Peter Christoffersen and Lorenzo Giorgianni

Journal of Business & Economic Statistics, 2000, vol. 18, issue 2, 242-53

Abstract: We use a time series modeling approach to address two related questions of interest to foreign-exchange market participants and policy makers dealing with basket currencies. First, how are unknown weights appropriately extracted from basket currencies? Second, how does one correctly account for the risk--in terms of conditional variance of expected profits--that time-varying weights add to the standard basket-hedge position? We suggest a methodology that can provide answers to these questions and apply it to the heavily traded Thai baht currency basket.

Date: 2000
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