TY - JOUR
T1 - Beyond the carry trade
T2 - optimal currency portfolios
AU - Barroso, Pedro
AU - Santa-Clara, Pedro
N1 - Publisher Copyright:
Copyright © 2015 Michael G. Foster School of Business, University of Washington.
PY - 2015/12/9
Y1 - 2015/12/9
N2 - 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.
AB - 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.
UR - http://www.scopus.com/inward/record.url?scp=84951838884&partnerID=8YFLogxK
U2 - 10.1017/S0022109015000460
DO - 10.1017/S0022109015000460
M3 - Article
SN - 0022-1090
VL - 50
SP - 1037
EP - 1056
JO - Journal of Financial and Quantitative Analysis
JF - Journal of Financial and Quantitative Analysis
IS - 5
ER -
