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- Publisher Website: 10.1093/rof/rfac014
- WOS: WOS:000785565200001
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Article: Market Timing and Predictability in FX Markets
Title | Market Timing and Predictability in FX Markets |
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Authors | |
Issue Date | 2022 |
Citation | Review of Finance, 2022, Forthcoming How to Cite? |
Abstract | We study the economic value of market timing in FX markets, i.e., using information about the conditional Sharpe ratio to adjust the notional value of a conditionally mean-variance efficient currency portfolio. Our strategy trades more (less) aggressively when the conditional risk-return trade-off is more (less) favorable. This leads to a significant improvement in the out-of-sample unconditional Sharpe ratio, skewness and maximum drawdown per 1% expected excess return. The strategy’s market timing predicts returns, volatility and skewness in FX markets. Popular currency pricing factors do not explain the strategy’s high average excess returns. Our findings suggest that it is costly to impose leverage or risk (i.e., conditional volatility) limits or other inferior market timing policies when constructing currency trading strategies. |
Persistent Identifier | http://hdl.handle.net/10722/311306 |
ISI Accession Number ID |
DC Field | Value | Language |
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dc.contributor.author | Maurer, TA | - |
dc.contributor.author | Tô, T | - |
dc.contributor.author | Tran, N | - |
dc.date.accessioned | 2022-03-21T08:47:48Z | - |
dc.date.available | 2022-03-21T08:47:48Z | - |
dc.date.issued | 2022 | - |
dc.identifier.citation | Review of Finance, 2022, Forthcoming | - |
dc.identifier.uri | http://hdl.handle.net/10722/311306 | - |
dc.description.abstract | We study the economic value of market timing in FX markets, i.e., using information about the conditional Sharpe ratio to adjust the notional value of a conditionally mean-variance efficient currency portfolio. Our strategy trades more (less) aggressively when the conditional risk-return trade-off is more (less) favorable. This leads to a significant improvement in the out-of-sample unconditional Sharpe ratio, skewness and maximum drawdown per 1% expected excess return. The strategy’s market timing predicts returns, volatility and skewness in FX markets. Popular currency pricing factors do not explain the strategy’s high average excess returns. Our findings suggest that it is costly to impose leverage or risk (i.e., conditional volatility) limits or other inferior market timing policies when constructing currency trading strategies. | - |
dc.language | eng | - |
dc.relation.ispartof | Review of Finance | - |
dc.title | Market Timing and Predictability in FX Markets | - |
dc.type | Article | - |
dc.identifier.email | Maurer, TA: maurer@hku.hk | - |
dc.identifier.authority | Maurer, TA=rp02560 | - |
dc.identifier.doi | 10.1093/rof/rfac014 | - |
dc.identifier.hkuros | 332150 | - |
dc.identifier.volume | Forthcoming | - |
dc.identifier.isi | WOS:000785565200001 | - |