Interest Rate Arbitrage in Currency Baskets: Forecasting Weights and Measuring Risk

30 Pages Posted: 10 Feb 2006

See all articles by Peter Christoffersen

Peter Christoffersen

University of Toronto - Rotman School of Management; Copenhagen Business School; Aarhus University - CREATES

Lorenzo Giorgianni

International Monetary Fund (IMF)

Multiple version iconThere are 2 versions of this paper

Date Written: January 1999

Abstract

When constructing hedged interest rate arbitrage portfolios for basket currencies, two issues arise: first, how are the unknown future basket weights optimally forecasted from past exchange rate data? And, second, how is risk - in terms of the conditional variance of expected profits from the interest rate arbitrage portfolio - appropriately measured when the basket weights are time-varying? Answers to these questions are provided within a time-varying parameter modeling framework estimated through the Kalman filter. An empirical application is devoted to the experience of the Thai baht currency basket (January 1992-February 1997).

Keywords: Time-varying Parameters, Cointegration, Exchange Rates

JEL Classification: C53, F37

Suggested Citation

Christoffersen, Peter and Giorgianni, Lorenzo, Interest Rate Arbitrage in Currency Baskets: Forecasting Weights and Measuring Risk (January 1999). IMF Working Paper, Vol. , pp. 1-30, 1999. Available at SSRN: https://ssrn.com/abstract=880543

Peter Christoffersen (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5P 3C4
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416-946-5511 (Phone)

Copenhagen Business School

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Frederiksberg C, DK - 2000
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Aarhus University - CREATES

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Lorenzo Giorgianni

International Monetary Fund (IMF) ( email )

700 19th Street NW
Asia and Pacific Department
Washington, DC 20431
United States
202-623-5326 (Phone)

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