The Profitability of Currency Speculation
41 Pages Posted: 23 Aug 2000 Last revised: 10 Oct 2022
Date Written: September 1983
Abstract
This paper presents the results of a post-sample simulation of a speculative strategy using a portfolio of foreign currency forward contracts.The main new features of the speculative strategy are (a)the use of Kalman filters to update the forecasting equation, (b) the allowance for transactions,costs and margin requirements and (c) the endogenous determination of the leveraging of the portfolio. While the forecasting model tended to overestimate profit and underestimate risk, the strategy was still profitable over a three year period and it was possible to reject the hypothesis that the sum of profits was zero. Furthermore, the currency portfolio was found to have an extremely low market risk. Combinations of the speculative currency portfolio with traditional portfolios of U.S. equities resulted in considerable improvements in risk-adjusted returns on capital.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
By Richard M. Levich and Lee R. Thomas
-
Technical Trading Rule Profitability and Foreign Exchange Intervention
-
Technical Trading Rule Profitability and Foreign Exchange Intervention
-
By Andrew W. Lo, Harry Mamaysky, ...
-
Maximizing Predictability in the Stock and Bond Markets
By Andrew W. Lo and A. Craig Mackinlay
-
Do Momentum Based Strategies Still Work in Foreign Currency Markets?
By Derek R. White and John Okunev