Interest Rate Arbitrage in Currency Baskets: Forecasting Weights and Measuring Risk
Peter Christoffersen
University of Toronto - Rotman School of Management; Copenhagen Business School; University of Aarhus - CREATES
Lorenzo Giorgianni
International Monetary Fund (IMF)
Journal of Business and Economic Statistics
Abstract:
We use a time-series modeling approach to address two related questions of interest to foreign exchange market participants and policy makers dealing with basket currencies. First, how are unknown weights appropriately extracted from basket currencies? Second, how does one correctly account for the risk-in terms of conditional variance of expected profits-that time-varying weights add to the standard basket hedge position? We suggest a methodology that can provide answers to these questions and apply it to the heavily traded Thai baht currency basket.
Number of Pages in PDF File: 33
JEL Classification: C53, F31
Accepted Paper Series
Suggested Citation
Christoffersen, Peter and Giorgianni, Lorenzo, Interest Rate Arbitrage in Currency Baskets: Forecasting Weights and Measuring Risk. Journal of Business and Economic Statistics. Available at SSRN: http://ssrn.com/abstract=184608 or http://dx.doi.org/10.2139/ssrn.184608
