Optimal Carry Trade Portfolio Choice under Regime Shifts
2013/05/14
研討會日期 : 2013-05-14
時間 : 14:30
主講人 : Professor Chih-Nan Chen
地點 : Conference Room B110
演講者簡介 : Chih-Nan Chen received his Ph.D. in Economic from Boston University in 2008. He is currently serving as Assistant Professor of Economics at National Taipei University. His research fields are econometrics, health economics, and international finance.
演講摘要 : This paper studies an optimal currency allocation problem of the carry trade in foreign exchange (FX). A number of empirical studies documents a phenomenon referred to as ‘forward premium puzzle’, stating that the carry trade being profitable on average. However, recent carry reversal during the 2008 global crisis periods wiped out the profits earned by carry trade. To account for the regime shifts in the joint distribution of returns on the carry trade with FX market portfolios, we adopt a Markov regime switching model. We find evidence of two economic regimes: one state captures periods of forward premium puzzle and UIP is violated. The other regime represents that forward premium puzzle is largely absent from the data and captures major currency crashes. Furthermore, to quantify the economic significance of regimes in returns on currency portfolios, we consider their importance on investors’ optimal portfolio allocation problem. We find strong evidence that optimal currency portfolio holdings vary significantly across regimes and across short and long investment horizons as investors anticipate shift out of the current state. Our results also show that the regime-switching model partially anticipated peso events, generating the overall stronger performance than the single-state Gaussian IID model and a carry trade portfolio.
