Beyond the carry trade: Optimal currency portfolios

Pedro Barroso, Pedro Santa-Clara

Research output: Contribution to journalArticle

37 Citations (Scopus)

Abstract

We test the relevance of technical and fundamental variables in forming currency portfolios. Carry, momentum, and value reversal all contribute to portfolio performance, whereas the real exchange rate and the current account do not. The resulting optimal portfolio produces out-of-sample returns that are not explained by risk and are valuable to diversified investors holding stocks and bonds. Exposure to currencies increases the Sharpe ratio of diversified portfolios by 0.5 on average, while reducing crash risk. We argue that besides risk, currency returns reflect the scarcity of speculative capital.

Original languageEnglish
Pages (from-to)1037-1056
Number of pages20
JournalJournal of Financial and Quantitative Analysis
Volume50
Issue number5
DOIs
Publication statusPublished - 9 Dec 2015

Keywords

  • FOREIGN-EXCHANGE MARKET
  • CROSS-SECTION
  • CURRENT ACCOUNT
  • RATE MODELS
  • RISK
  • MOMENTUM
  • RATES
  • RETURNS
  • FUNDAMENTALS
  • DIVERSIFICATION

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