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currencies against the dollar expected to have the highest returns, which we call the top-3 (T3) portfolio. The results of these experiments are reported in table 7.

Table 7 – Portfolio Performance. Out-of-Sample, Fixed-Window Rolling Regressions. Summary Statistics

Estimation sample for first window: December 2000 to December 2004. Prediction window:

March 2005 to March 2009.

(a) Equal-Weights Portfolio

RW

VAR

VECM

VECM+X

Threshold

Mean

-0.0114

0.0150

0.0115

0.0121

0.0162

S. Deviation

0.0506

0.0415

0.0400

0.0416

0.0466

Skewness

-4.2348

1.6969

3.3985

2.4404

3.4822

Kurtosis

17.8197

6.1447

13.6144

8.4676

15.5956

C. Variation

-4.4401

2.7677

3.4657

3.4486

2.8712

Ann. Return

-4.48%

6.13%

4.69%

4.91%

6.66%

Ann. Sharpe

-0.4504

0.7226

0.5771

0.5799

0.6966

RW

VAR

VECM

VECM+X

Threshold

Mean

-0.0116

0.0115

0.0094

0.0121

0.0132

S. Deviation

0.0420

0.0385

0.0345

0.0382

0.0384

Skewness

-2.2895

1.5597

2.3828

2.3703

2.3007

Kurtosis

6.3021

4.9002

7.6659

7.1810

6.6529

C. Variation

-3.6338

3.3458

3.6882

3.1693

2.9147

Ann. Return

-4.54%

4.68%

3.79%

4.91%

5.38%

Ann. Sharpe

-0.5504

0.5978

0.5423

0.6311

0.6862

These results further confirm the dominance of our preferred nonlinear threshold model based on VX . Notice that in every case, this model achieves the highest out-of- sample returns (5.38% for EW; 6.66% for RW; and 8.31% for T3) with much

(b) Returns-weighted portfolio

RW

VAR

VECM

VECM+X

Threshold

Mean

-0.0129

0.0185

0.0107

0.0115

0.0202

S. Deviation

0.0603

0.0518

0.0475

0.0503

0.0551

Skewness

-2.4592

1.5660

2.3598

1.8422

1.7983

Kurtosis

7.4165

4.4723

7.6758

5.3789

5.0294

C. Variation

-4.6744

2.7942

4.4323

4.3780

2.7323

Ann. Return

-5.06%

7.62%

4.35%

4.67%

8.31%

Ann. Sharpe

-0.4279

0.7158

0.4512

0.4568

0.7320

(c) Best three portfolio

Notes: Equal-weights portfolio refers to investing in each currency in our sample in equal proportion; Returns-weighted portfolio refers to investing in each currency in proportion to the expected return on that currency; Best-three portfolio refers to the portfolio that invests an equal amount to the three currencies expected to have the highest rate of return.

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