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On optimising risk exposures with trend-following strategies in currency overlay portfolios

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journal contribution
posted on 2016-11-17, 16:27 authored by Kai-Hong TeeKai-Hong Tee
This paper proposed an optimisation mechanism in the currency overlay portfolios construction process, an area that has not been explored in the literature that tend to focus on pre-determined fixed weights, such as the trading volume of currencies from the survey of the Bank for International Settlement, to construct overlay portfolios and may not always be optimal. This paper optimises the portfolio using the Cholesky Decomposition-based multivariate TVC (Time varying correlation)-GARCH and CC (Constant correlation) GARCH models as allocation schemes, with underlying currencies’ returns originated from a moving average-based trend following single FX strategy in a certain hedging criterion. This paper includes a FX strategy based on the equally weighted (average) of the three different single moving average days to determine hedging needs underlying the hedging criterion. The paper uses the returns of the strategies of EW (equally weighted)-TFX and TFX to construct the optimal currencies overlay portfolios. The findings reveal the EW-TFX portfolios with the TVC-GARCH scheme have the best risk-adjusted portfolio returns. There are some evidences on the significant differences of the portfolios' returns of the EW-TFX overlay portfolios with other currencies portfolios, hence supporting the outperformance. The findings also support existing evidence in the literature.

History

School

  • Business and Economics

Department

  • Business

Published in

Journal of investment Strategies

Volume

6

Issue

1

Pages

47-68

Citation

TEE, K.-H., 2016. On optimising risk exposures with trend-following strategies in currency overlay portfolios. Journal of Investment Strategies, 6(1), pp.47-68.

Publisher

Incisive Risk Information Limited

Version

  • AM (Accepted Manuscript)

Publisher statement

This work is made available according to the conditions of the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International (CC BY-NC-ND 4.0) licence. Full details of this licence are available at: https://creativecommons.org/licenses/by-nc-nd/4.0/

Acceptance date

2016-10-26

Publication date

2016-12-02

Copyright date

2016

Notes

This paper was accepted for publication in Journal of Investment Strategies, it can be found at http://dx.doi.org/10.21314/JOIS.2016.078

ISSN

2047-1238

eISSN

2047-1246

Language

  • en