Abstract
We examine the effectiveness of Foster-Hart optimization for currency portfolios. Compared to stock trading, short selling is quite common in currency trading. Combining long and short positions leads to maintaining positive expected portfolio returns. Foster-Hart optimization is more applicable to currency portfolios than to stock portfolios because the Foster-Hart risk measure is not defined for the gamble whose expected returns are negative. Our sample portfolio consists of ten European currencies. For time series analysis, we employ a generalized autoregressive conditional heteroscedasticity (GARCH) model with multivariate normal tempered stable (MNTS) distributed residuals in order to capture fat-tailedness, skewness, and asymmetric interdependence of exchange rate dynamics. Statistical tests indicate that the model is recommendable among the candidate models. We establish that Foster-Hart optimization is more profitable than standard techniques in this context.
Acknowledgements
We appreciate Professor Svetlozar Rachev for his continuous guidance and encouragements throughout the process of writing this paper. The opinions, findings, conclusions or recommendations expressed in this paper are our own and do not necessarily reflect the views of the Bank of Japan. Also, all remaining errors are entirely our own.
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Supplementary Material
The online version of this article offers supplementary material (DOI: https://doi.org/10.1515/snde-2017-0119).
©2019 Walter de Gruyter GmbH, Berlin/Boston
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Articles in the same Issue
- Research Articles
- A unified framework jointly explaining business conditions, stock returns, volatility and “volatility feedback news” effects
- Efficient estimation of financial risk by regressing the quantiles of parametric distributions: An application to CARR models
- A parametric stationarity test with smooth breaks
- Regression discontinuity designs with unknown state-dependent discontinuity points: estimation and testing
- Foster-Hart optimization for currency portfolios
- Asymmetric impact of uncertainty in recessions: are emerging countries more vulnerable?