The Profitability of Currency Speculation

John Bilson and David A. Hsieh

No 1197, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper presents the results of a post-sample simulation of a speculative strategy using a portfolio of foreign currency forward contracts.The main new features of the speculative strategy are (a)the use of Kalman filters to update the forecasting equation, (b) the allowance for transactions,costs and margin requirements and (c) the endogenous determination of the leveraging of the portfolio. While the forecasting model tended to overestimate profit and underestimate risk, the strategy was still profitable over a three year period and it was possible to reject the hypothesis that the sum of profits was zero. Furthermore, the currency portfolio was found to have an extremely low market risk. Combinations of the speculative currency portfolio with traditional portfolios of U.S. equities resulted in considerable improvements in risk-adjusted returns on capital.

Date: 1983-09
Note: ITI IFM
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Published as Bilson, John F. O. & Hsieh, David A., 1987. "The profitability of currency speculation," International Journal of Forecasting, Elsevier, vol. 3(1), pages 115-130.

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Journal Article: The profitability of currency speculation (1987)
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