Interest Rate Arbitrage in Currency Baskets: Forecasting Weights and Measuring Risk
Mr. Peter F. Christoffersen · Mr. Lorenzo Giorgianni
Jan 1999 · International Monetary Fund
Ebook
30
Pages
About this ebook
When constructing hedged interest rate arbitrage portfolios for basket currencies, two issues arise: first, how are the unknown future basket weights optimally forecasted from past exchange rate data? And, second, how is risk—in terms of the conditional variance of expected profits from the interest rate arbitrage portfolio—appropriately measured when the basket weights are time-varying? Answers to these questions are provided within a time-varying parameter modeling framework estimated through the Kalman filter. An empirical application is devoted to the experience of the Thai baht currency basket (January 1992–February 1997).
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