Factor Investing and forex Portfolio Management

Mario Cerrato, Danyang Li and Zhekai Zhang

Working Papers from Business School - Economics, University of Glasgow

Abstract: Lustig, Roussanov, and Verdelhan (2011) have recently introduced the “dollar risk factor”(DOL) and the “carry trade factor”(HML), and show that they can price carry trade portfolios, in the cross-section. This new result is useful not just in the academic literature on cross-sectional asset pricing, but also in risk management and portfolio optimization, as the same factors are widely used in the industry. In this paper, we test the relevance of these factors in contributing to a diversified forex portfolio and risk management. It is surprising that very little has been done on this important issue. We shall try to fill this gap. In contrast to the existing literature we first consider a large and detailed study to investigate the effect of introducing asymmetry and time-varying effects amongst the factors, thereafter we measure their economic adds value to a forex portfolio in terms of fx investment allocation and risk management. We show that modelling non-linear dependency is important and adds value to a forex portfolio.

JEL-codes: G11 G12 G17 (search for similar items in EconPapers)
Date: 2020-08
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Persistent link: https://EconPapers.repec.org/RePEc:gla:glaewp:2020_01

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