The Profitability of Currency Speculation

41 Pages Posted: 23 Aug 2000 Last revised: 10 Oct 2022

See all articles by John F. O. Bilson

John F. O. Bilson

Illinois Institute of Technology; National Bureau of Economic Research (NBER)

David A. Hsieh

Duke University - Fuqua School of Business; Duke University - Department of Economics; National Bureau of Economic Research (NBER)

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

Bilson, John F. O. and Hsieh, David Arthur, The Profitability of Currency Speculation (September 1983). NBER Working Paper No. w1197, Available at SSRN: https://ssrn.com/abstract=235675

John F. O. Bilson

Illinois Institute of Technology ( email )

Stuart Graduate School of Business
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National Bureau of Economic Research (NBER)

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David Arthur Hsieh (Contact Author)

Duke University - Fuqua School of Business ( email )

Department of Finance
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Duke University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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United States

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