Let the Parametric Phoenix Fly

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Reference

Barroso, P., Reichecker, M. R., & Reichenecker, J. A. (2019). Let the Parametric Phoenix Fly.

Publication type

Working Paper

Abstract

In international portfolios investors move away from domestic-only investing and diversify their allocation of assets by foreign equities. The exposure to foreign currencies adds an additional risk component which is managed in the currency overlay. To achieve an ideal weighting of the allocation of assets and the exposure to currencies, this study proposes a novel approach for a joint optimization. For the optimal weighting of equities we suggest to employ characteristics of momentum, value, and size strategies while currencies are allocated according to characteristics of carry trade, currency momentum, and currency value strategies. Relative to a benchmark and in an out-of-sample setting, we document an increase in the portfolios’ Sharpe ratio by 30% after transaction and rebalancing costs. This relative improvement is primarily driven by the increase in portfolios’ returns, while the portfolios’ overall volatility remains unaffected.

Research

Enhanced Carry Trades - A new Approach in Asset Management and Trading
PhD-Thesis, February 2014 until February 2018 (finished)

Standard carry trades sell low-yield currencies and buy high-yield currencies. The trading idea is to capture the interest rate differential between currencies. The unique selection criterion of ... more ...

Persons

Organizational Units

  • Institute for Financial Services
  • Chair in Business Administration, Banking and Financial Management