Exchange rate forecasting and the performance of currency portfolios |
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| Authors: | Jesus Crespo Cuaresma,Ines Fortin,Jaroslava Hlouskova |
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| Affiliation: | 1. Department of Economics, Vienna University of Economics and Business (WU), Vienna, Austria;2. Wittgenstein Centre for Demography and Global Human Capital (WIC), Vienna, Austria;3. World Population Program, International Institute for Applied Systems Analysis (IIASA), Laxenburg, Austria;4. Austrian Institute of Economic Research (WIFO), Vienna, Austria;5. Research Group Macroeconomics and Economic Policy, Institute for Advanced Studies, Vienna, Austria;6. Department of Economics, Thompson Rivers University, Kamloops, BC, Canada;7. Ecosystems Services and Management, International Institute for Applied Systems Analysis, Laxenburg, Austria |
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| Abstract: | We examine the potential gains of using exchange rate forecast models and forecast combination methods in the management of currency portfolios for three exchange rates: the euro versus the US dollar, the British pound, and the Japanese yen. We use a battery of econometric specifications to evaluate whether optimal currency portfolios implied by trading strategies based on exchange rate forecasts outperform single currencies and the equally weighted portfolio. We assess the differences in profitability of optimal currency portfolios for different types of investor preferences, two trading strategies, mean squared error‐based composite forecasts, and different forecast horizons. Our results indicate that there are clear benefits of integrating exchange rate forecasts from state‐of‐the‐art econometric models in currency portfolios. These benefits vary across investor preferences and prediction horizons but are rather similar across trading strategies. |
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| Keywords: | currency portfolios exchange rate forecasting profitability trading strategies |
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