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 language | English |
|---|---|
| Pages (from-to) | 1037-1056 |
| Number of pages | 20 |
| Journal | Journal of Financial and Quantitative Analysis |
| Volume | 50 |
| Issue number | 5 |
| DOIs | |
| Publication status | Published - 9 Dec 2015 |
| Externally published | Yes |
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This output contributes to the following UN Sustainable Development Goals (SDGs)
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SDG 3 Good Health and Well-being
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