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The Journal of Portfolio Management

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Primary Article

Optimal Portfolios of Foreign Currencies

Jamil Baz, Francis Breedon, Vasant Naik and Joel Peress
The Journal of Portfolio Management Fall 2001, 28 (1) 102-111; DOI: https://doi.org/10.3905/jpm.2001.319826
Jamil Baz
Co-head of European Fixed Income Research at Lehman Brothers in London, England.
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Francis Breedon
A consultant at Lehman Brothers in London.
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Vasant Naik
Head of the Quantitative Strategies Group, Fixed Income Research at Lehman Brothers in London.
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Joel Peress
A research fellow, Financial Markets Group, at the London School of Economics in London.
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Abstract

Empirical evidence suggests that forward exchange rates are biased predictors of future spot exchange rates. Currencies with higher nominal interest rates tend to appreciate rather than depreciate as predicted by the forward rates. Simultaneously, exchange rates also turn out to be notoriously difficult to predict using plausible macroeconomic variables. The authors demonstrate how these two hypotheses can be combined with standard mean–variance analysis to construct optimal currency portfolios. They simulate the optimal portfolio strategies on historically observed data for the period 1989–1999 for DEM, JPY, GBP, and CHF (with the USD as the base currency). These portfolios generate positive excess returns. Moreover, the returns on optimal currency portfolios do not appear to be correlated with the returns on major fixed–income and equity indexes. These findings suggest that the methodology can provide a useful benchmark against which to evaluate more elaborate active currency strategies.

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The Journal of Portfolio Management
Vol. 28, Issue 1
Fall 2001
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Optimal Portfolios of Foreign Currencies
Jamil Baz, Francis Breedon, Vasant Naik, Joel Peress
The Journal of Portfolio Management Oct 2001, 28 (1) 102-111; DOI: 10.3905/jpm.2001.319826

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Optimal Portfolios of Foreign Currencies
Jamil Baz, Francis Breedon, Vasant Naik, Joel Peress
The Journal of Portfolio Management Oct 2001, 28 (1) 102-111; DOI: 10.3905/jpm.2001.319826
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