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| Type | Master's Thesis |
| Scope | Discipline-based scholarship |
| Title | Joint Optimization of Assets and Currency Exposures in International Markets |
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| Institution | University of Zurich |
| Faculty | Faculty of Business, Economics and Informatics |
| Date | 2020 |
| Abstract Text | This thesis investigates the benefits of a joint optimization approach to international portfolio optimization in the mean-variance framework. In this joint approach, asset weights and currency exposures, which are modeled through currency forward contracts, are determined in a single optimization. This optimization solves the classical mean-variance problem (based on the sample covariance matrix) in an international setting, while also employing several extensions to the mean-variance framework that have been proposed in the literature. These extensions aim at reducing the parameter uncertainty related to the input parameters. This is achieved by either shrinking the optimization parameters [Ledoit and Wolf, 2003, 2004] or constraining the norms of the portfolio-weight vector [Li, 2015, DeMiguel et al., 2009a]. Furthermore, a general framework is created to formulate these rules in the international setting with the possibility to add additional constraints. These portfolio rules are then extended by two further rules, which are inspired by practical considerations that govern the maximal net exposure to foreign currencies. The thesis also motivates the joint approach through an in-sample analysis that is able to show its potential benefits. A total of nine different portfolio rules are then tested out-of-sample on three different data sets and compared to the 1/N benchmark. For each rule a portfolio is created using the joint approach proposed in this thesis, as well as another portfolio that follows a separate overlay approach, which first optimizes the assets and then chooses the currency exposure weights in a second step. The performance of the portfolios is evaluated empirically using different portfolio performance measures that are also translated into the context of international portfolio optimization. Using these measures, it was found that, across different portfolio rules and data sets, the joint optimization approach is not able to improve the portfolio performance consistently. |
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