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Volatility and Correlation Timing in Active Currency Management

Della Corte, P., Sarno, L. and Tsiakas, I. (2012). Volatility and Correlation Timing in Active Currency Management. In: James, J., Marsh, I. W. and Sarno, L. (Eds.), Handbook of Exchange Rates. (pp. 421-447). New Jersey, USA: Wiley. ISBN 9780470768839

Abstract

This chapter examines how dynamic volatilities and correlations in exchange rate returns affect the optimal portfolio choice of a risk-averse investor engaging in international asset allocation. We take a Bayesian approach in estimation and asset allocation that accounts for parameter and model uncertainty, and find substantial economic value in both volatility and correlation timing. This result is robust to reasonable transaction costs, parameter and model uncertainty, and alternative specifications for volatilities and correlations.

Publication Type: Book Section
Additional Information: Copyright John Wiley & Sons Ltd, 2012.
Publisher Keywords: Asset Allocation; Exchange Rates; Volatility Timing; Correlation Timing; Parameter Uncertainty; Model Uncertainty; Bayesian Model Averaging
Subjects: H Social Sciences > HG Finance
Departments: Cass Business School > Finance
URI: http://openaccess.city.ac.uk/id/eprint/13162
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