Forecasting covariance for optimal carry trade portfolio allocations

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

doi:10.1109/ICASSP.2017.7953290

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 proceeding › Conference contribution

2 Citations (Scopus)

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 language	English
Title of host publication	2017 IEEE International Conference on Acoustics, Speech and Signal Processing (ICASSP)
Publisher	IEEE
Pages	5910-5914
Number of pages	5
ISBN (Electronic)	9781509041176
DOIs	https://doi.org/10.1109/ICASSP.2017.7953290
Publication status	Published - 19 Jun 2017
Event	42nd IEEE International Conference on Acoustics, Speech, and Signal Processing 2017 - New Orleans, United States Duration: 5 Mar 2017 → 9 Mar 2017

Publication series

Name	IEEE International Conference on Acoustics, Speech and Signal Processing
Publisher	IEEE
ISSN (Electronic)	2379-190X

Conference

Conference	42nd IEEE International Conference on Acoustics, Speech, and Signal Processing 2017
Abbreviated title	ICASSP 2017
Country/Territory	United States
City	New Orleans
Period	5/03/17 → 9/03/17

Keywords

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

ASJC Scopus subject areas

Software
Signal Processing
Electrical and Electronic Engineering

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10.1109/ICASSP.2017.7953290

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

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title = "Forecasting covariance for optimal carry trade portfolio allocations",

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.",

keywords = "Covariance Forecasting, Covariance Regression, Currency Carry Trade, Equal Risk Contribution, Markowitz Portfolio",

author = "Matthew Ames and Guillaume Bagnarosa and Peters, {Gareth W.} and Pavel Shevchenko and Tomoko Matsui",

year = "2017",

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booktitle = "2017 IEEE International Conference on Acoustics, Speech and Signal Processing (ICASSP)",

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note = "42nd IEEE International Conference on Acoustics, Speech, and Signal Processing 2017, ICASSP 2017 ; Conference date: 05-03-2017 Through 09-03-2017",

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Ames, M, Bagnarosa, G, Peters, GW, 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). IEEE International Conference on Acoustics, Speech and Signal Processing, IEEE, pp. 5910-5914, 42nd IEEE International Conference on Acoustics, Speech, and Signal Processing 2017, New Orleans, Louisiana, United States, 5/03/17. https://doi.org/10.1109/ICASSP.2017.7953290

Forecasting covariance for optimal carry trade portfolio allocations. / Ames, Matthew; Bagnarosa, Guillaume; Peters, Gareth W. et al.
2017 IEEE International Conference on Acoustics, Speech and Signal Processing (ICASSP). IEEE, 2017. p. 5910-5914 (IEEE International Conference on Acoustics, Speech and Signal Processing).

Research output: Chapter in Book/Report/Conference proceeding › Conference contribution

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KW - Currency Carry Trade

KW - Equal Risk Contribution

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Forecasting covariance for optimal carry trade portfolio allocations

Abstract

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Conference

Keywords

ASJC Scopus subject areas

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