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

Department of Applied Finance

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

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 2017 - Proceedings
Publisher	Institute of Electrical and Electronics Engineers (IEEE)
Pages	5910-5914
Number of pages	5
ISBN (Electronic)	9781509041176
DOIs	https://doi.org/10.1109/ICASSP.2017.7953290
Publication status	Published - 16 Jun 2017
Event	2017 IEEE International Conference on Acoustics, Speech, and Signal Processing, ICASSP 2017 - New Orleans, United States Duration: 5 Mar 2017 → 9 Mar 2017

Conference

Conference	2017 IEEE International Conference on Acoustics, Speech, and Signal Processing, 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

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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 2017 - Proceedings (pp. 5910-5914). Article 7953290 Institute of Electrical and Electronics Engineers (IEEE). https://doi.org/10.1109/ICASSP.2017.7953290

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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 2017 - Proceedings., 7953290, Institute of Electrical and Electronics Engineers (IEEE), pp. 5910-5914, 2017 IEEE International Conference on Acoustics, Speech, and Signal Processing, ICASSP 2017, New Orleans, 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 2017 - Proceedings. Institute of Electrical and Electronics Engineers (IEEE), 2017. p. 5910-5914 7953290.

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

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AU - Bagnarosa, Guillaume

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AU - Shevchenko, Pavel

AU - Matsui, Tomoko

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AB - 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.

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KW - covariance Regression

KW - currency carry trade

KW - equal risk contribution

KW - markowitz portfolio

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M3 - Conference proceeding contribution

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BT - 2017 IEEE International Conference on Acoustics, Speech, and Signal Processing, ICASSP 2017 - Proceedings

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Y2 - 5 March 2017 through 9 March 2017

ER -

Forecasting covariance for optimal carry trade portfolio allocations

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