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Contribution Details

Type Master's Thesis
Scope Discipline-based scholarship
Title Volatility-Managed Currency Strategies
Organization Unit
Authors
  • Tanja Lanz
Supervisors
  • Alexandre Ziegler
Language
  • English
Institution University of Zurich
Faculty Faculty of Business, Economics and Informatics
Number of Pages 73
Date 2020
Abstract Text Momentum and carry strategies are common ways to take profits from foreign exchange markets. While currency momentum strategies are less skewed towards the negative, they underperform currency carry strategies in terms of risk adjusted returns. Though the carry strategy is known among investors for its high risk adjusted returns, every once and then the strategy crashes and wipes out years of gains within few weeks. This fact motivates the investigation of signals which indicate the strategies’ downand upscaling in order to reduce negative skewness for carry strategies and increase average excess returns for momentum, while reducing volatility overall. Literature has documented that crashes in the FX market for both strategies frequently happen when market volatility is high. Thus, several papers suggest the investigation of volatility measures to take as indicators. While Burnside et al. (2011a) or Brunnermeier et al. (2008) have done their analysis using implied volatility, Moreira and Muir (2017) and Menkho↵ et al. (2012a) used realized variance instead. This paper adds to existing literature with its examination of a variety of indicators and scaling methods. Importantly, this paper bases the analysis on a wide cross-section of currencies, comprising of both emerging market (EM) currencies and developed market (DM) currencies. While some papers have examined the one or the other, the author is unaware of a direct comparison between volatility managed currency strategies in developed and emerging markets. Further, the paper aims at analyzing the magnitude of performance contribution of this volatility management over time and more precisely between the market crises in 2008 and 2020.
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