Forecasting covariance for optimal carry trade portfolio allocations

Matthew Ames, Guillaume Bagnarosa, Gareth W. Peters, Pavel Shevchenko, Tomoko Matsui

Research output: Chapter in Book/Report/Conference proceedingConference contribution

Abstract

Modelling and forecasting of asset volatility and covariance is of prime importance in the construction of portfolios. In this paper, we present a generalised multi-factor model that incorporates heteroskedasticity and dependence in the idiosyncratic error terms. We apply this model to forecasting the time-varying covariances in a basket of high interest rate and a basket of low interest rate carry trade currencies and then utilise these forecasts for portfolio optimisation. We compare traditional Markowitz portfolio optimisation to the more recently popular risk-based portfolio optimisation. Our model is shown to provide superior risk-adjusted returns for a currency carry trade strategy over the period 1999 - 2014.

Original languageEnglish
Title of host publication2017 IEEE International Conference on Acoustics, Speech and Signal Processing (ICASSP)
PublisherIEEE
Pages5910-5914
Number of pages5
ISBN (Electronic)9781509041176
DOIs
Publication statusPublished - 19 Jun 2017
Event42nd IEEE International Conference on Acoustics, Speech, and Signal Processing 2017 - New Orleans, United States
Duration: 5 Mar 20179 Mar 2017

Publication series

NameIEEE International Conference on Acoustics, Speech and Signal Processing
PublisherIEEE
ISSN (Electronic)2379-190X

Conference

Conference42nd IEEE International Conference on Acoustics, Speech, and Signal Processing 2017
Abbreviated titleICASSP 2017
CountryUnited States
CityNew Orleans
Period5/03/179/03/17

Keywords

  • Covariance Forecasting
  • Covariance Regression
  • Currency Carry Trade
  • Equal Risk Contribution
  • Markowitz Portfolio

ASJC Scopus subject areas

  • Software
  • Signal Processing
  • Electrical and Electronic Engineering

Cite this

Ames, M., Bagnarosa, G., Peters, G. W., Shevchenko, P., & Matsui, T. (2017). Forecasting covariance for optimal carry trade portfolio allocations. In 2017 IEEE International Conference on Acoustics, Speech and Signal Processing (ICASSP) (pp. 5910-5914). (IEEE International Conference on Acoustics, Speech and Signal Processing). IEEE. https://doi.org/10.1109/ICASSP.2017.7953290