Portfolio Strategies for Developing Currencies – Carry and Momentum

Abstract

Widely used active trading signals in currency markets are carry, momentum, reversion and value. Further, to create a portfolio from the individual signals, the weights are quintile based in traditional currency setting where we invest equally in the long and short signals. In this study, we combine the carry and momentum signals to check the performance of combined strategy and explain the observation. Furthermore, for generating the portfolio from the individual signals, we propose a factor based weighting scheme and discuss its performance with the strategy based on naïve quintile weights. The combined strategy generates Information ratio of 0.92, better than both the individual strategies while the factor based portfolio achieves higher performance that the quantile approach.