Title: Exchange rate forecasting and the performance of currency portfolios
Authors: Ines Fortin - Institute for Advanced Studies (Austria) [presenting]
Jaroslava Hlouskova - Institute for Advanced Studies (Austria)
Jesus Crespo Cuaresma - Vienna University of Economics and Business (Austria)
Abstract: The potential gains of using exchange rate forecast models and forecast combination methods in the management of currency portfolios are examined for three exchange rates, the euro (EUR) versus the US dollar (USD), the British pound (GBP) and the Japanese yen (JPY). We use a battery of econometric specifications to evaluate whether optimal currency portfolios implied by trading strategies based on exchange rate forecasts out-perform single-currency and the equally weighted portfolio. We assess the differences in profitability of optimal currency portfolios for different types of investor preferences, different trading strategies, different composite forecasts and different forecast horizons. Our results indicate that the benefits of integrating exchange rate forecasts from state-of-the-art econometric models in currency portfolios are sensitive to the trading strategy under consideration and vary strongly across prediction horizons.