Abstract

https://ssrn.com/abstract=2711586
 


 



Forecasting Covariance for Optimal Carry Trade Portfolio Allocations


Matthew Ames


University College London - Department of Statistical Science

Guillaume Bagnarosa


ESC Rennes

Gareth William Peters


University College London - Department of Statistical Science; University of Oxford - Man Institute of Quantitative Finance; CMIS, Commonwealth Scientific and Industrial Research Organisation

Pavel V. Shevchenko


Applied Finance and Actuarial Studies, Macquarie University

January 6, 2016


Abstract:     
Modelling and forecasting of asset volatility and covariance is of prime importance in the construction of portfolios. In this paper, we present a generalised multi-factor model that incorporates heteroskedasticity and dependence in the idiosyncratic error terms. We apply this model to forecasting the time-varying covariances in a basket of high interest rate and a basket of low interest rate carry trade currencies and then utilise these forecasts for portfolio optimisation. We compare traditional Markowitz portfolio optimisation to the more recently popular risk-based portfolio optimisation. Our model is shown to provide superior risk-adjusted returns for a currency carry trade strategy over the period 1999-2014.

Number of Pages in PDF File: 5

Keywords: Covariance Forecasting, Currency Carry Trade, Covariance Regression, Markowitz Portfolio, Equal Risk Contribution

JEL Classification: C1, C5, F31, G11


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Date posted: January 7, 2016  

Suggested Citation

Ames, Matthew and Bagnarosa, Guillaume and Peters, Gareth William and Shevchenko, Pavel V., Forecasting Covariance for Optimal Carry Trade Portfolio Allocations (January 6, 2016). Available at SSRN: https://ssrn.com/abstract=2711586 or http://dx.doi.org/10.2139/ssrn.2711586

Contact Information

Matthew Ames (Contact Author)
University College London - Department of Statistical Science ( email )
Gower Street
London, WC1E 6BT
United Kingdom
Guillaume Bagnarosa
ESC Rennes ( email )
2, RUE ROBERT D'ARBRISSEL
Rennes, 35065
France
Gareth William Peters
University College London - Department of Statistical Science ( email )
Gower Street
London, WC1E 6BT
United Kingdom
HOME PAGE: http://garethpeters78.wixsite.com/garethwpeters
University of Oxford - Man Institute of Quantitative Finance ( email )
University of Oxford Eagle House
Walton Well Road
Oxford, OX2 6ED
United Kingdom
CMIS, Commonwealth Scientific and Industrial Research Organisation ( email )
Lyneham, NSW 2602
Australia
Pavel V. Shevchenko
Applied Finance and Actuarial Studies, Macquarie University ( email )
North Ryde
Sydney, New South Wales 2109
Australia
HOME PAGE: http://www.businessandeconomics.mq.edu.au/contact_the_faculty/all_fbe_staff/pavel_shevchenko
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