Volatility filters for FX portfolios trading: the impact of alternative volatility models

Jia Miao and Christian L. Dunis

Applied Financial Economics Letters, 2006, vol. 2, issue 6, 389-394

Abstract: Dunis and Miao (2005) find that the addition of volatility filters with RiskMetrics forecasts can improve the performance of moving average convergence and divergence (MACD) models that replicate typical currency fund managers introduced as in Lequeux and Acar (1998). The motivation of this paper is to test whether alternative volatility models forecasts can further improve the models’ performance with such filters. The two alternative volatility forecast models used in this paper are GARCH model as in Bollerslev (1986) and stochastic volatility model with Markov switching (MS) based on Hamilton (1994) and Roche and Rockinger (2003). Our results show that volatility filters using alternative volatility models fail to enhance the performance of the simpler filters using RiskMetrics forecasts in terms of annualized return and Sharpe ratio.

Date: 2006
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DOI: 10.1080/17446540600706783

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