Active Currency Overlay Strategies

Download or read book Active Currency Overlay Strategies written by Melanie Merlo and published by . This book was released on 2011 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Since the advent of floating exchange rates the management of currency risk has grown in importance and investors increasingly implement active currency overlay strategies in order to enhance overall risk-adjusted returns. Accordingly, much research has been devoted to the development and analysis of currency strategies, which are either based on fundamental or technical factors. However, most studies focus on strategies that are based on one factor only, whereas my approach is to analyze the profitability of active currency overlay strategies that are based on multiple factors. In particular, I forecast exchange rates with four different factor combinations and implement the resulting multifactor signals by means of four different currency allocation strategies. My results show that all tested active currency overlay strategies outperform the corresponding benchmark strategies even if transaction costs are accounted for.