 Maximally predictable currency portfoliosRichard D.F. Harris, Jian Shen and Fatih Yilmaz Journal of International Money and Finance, 2022, vol. 128, issue C Abstract: We investigate the predictability of the G10 currencies with respect to lagged currency returns from the perspective of a U.S. investor, using the maximally predictable portfolio (MPP) approach of Lo and MacKinlay (1997). We show that, out-of-sample, the MPP yields a higher Sharpe ratio, higher cumulative return and lower maximum drawdown than both a naïve equal-weighted portfolio of the currencies and an equal-weighted portfolio of momentum trading strategies, and that a mean–variance investor would be willing to pay a performance fee to switch from the naïve and momentum portfolios to the MPP. The MPP has performed particularly well since the 2008 financial crisis, in contrast with the momentum portfolio, the value of which declined significantly over this period. Our results are robust to the estimation window length, the type and level of portfolio weight constraints and transaction costs. Keywords: Currencies; Predictability; Trading strategies; Maximally predictable portfolio; Momentum and reversals (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:128:y:2022:i:c:s026156062200105x DOI: 10.1016/j.jimonfin.2022.102702 Access Statistics for this article Journal of International Money and Finance is currently edited by J. R. Lothian More articles in Journal of International Money and Finance from Elsevier |
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