Currency Overlay-Using Macro Trend to trade FX
Date Issued
2008
Date
2008
Author(s)
Ko, Tze-Jieh
Abstract
The equilibrium prices of foreign exchange markets are always determined by macro factors such as international trade, the flow of capital markets and etc. In recent years, the technical analyses of FX trading have been used widely; therefore it is very hard to earn excess return from technical analysis. Consequently, we want to find some FX trading rules that are easy and intuitional to get excess return.his paper is based on the technical report of Lehman Brothers (2007) and the manage style is alpha currency overlay. We consider three FX trading models which are equity sector model, commodity sector model and interest rate sector model; our purpose is to find the trading signals from the markets. We use G10 and Asia currencies as the assets of three different portfolios and construct a mixed portfolio called alpha currency overlay portfolio to diversify risk; finally we hope to get the absolute returns from this portfolio.y theoretical test of three FX trading models, we find these models can get excess return absolutely. Besides, the result is better by adding Asia currencies to original Lehman Brothers case. Moreover, the alpha currency overlay portfolio can effectively reduce the market risk and increase the Sharp ratio. Besides, in out-sample period, the result of back test displayed that the alpha currency overlay model can still earn the excess return despite the weak economy during 2008.
Subjects
Currency Overlay
Active Overlay
Pure Alpha Overlay
Type
thesis
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