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Safe Haven Currencies: A Portfolio Perspective

Last Updated on 10 February, 2024 by Rejaul Karim

The research paper “Safe Haven Currencies: A Portfolio Perspective” by Gino Cenedese offers a comprehensive exploration into the dynamics of currency portfolios, particularly focusing on their asymmetric correlations and their role as hedging instruments amidst contrasting market conditions.

By delving into the nuanced hedging benefits of currency portfolios during bear and bull markets, the study unravels the intricate relationship between currency characteristics and time-varying hedging benefits.

Moreover, it highlights the impact of regime shifts in financial markets on optimal portfolio selection across currency portfolios, emphasizing the advantages of unwinding carry trade positions and capitalizing on currency momentum during bear markets.

Furthermore, the paper sheds light on the diversification advantages gained by holding undervalued currencies and currencies from countries with robust current accounts and international investment positions.

These insights not only enrich our understanding of foreign exchange dynamics and portfolio optimization but also provide valuable guidance for strategic currency portfolio construction in the ever-evolving landscape of global financial markets.

Abstract Of Paper

Currency portfolios exhibit asymmetric correlations: during periods of bear, volatile world equity markets, currency portfolios provide different hedging benefits than in bull markets. I show how these time-varying hedging benefits depend on currency characteristics. This paper also illustrates how the presence of regime shifts in financial markets affects optimal portfolio choice across currency portfolios: during bear markets, investors are better off by unwinding carry trade positions, and by following currency momentum. Also, diversification benefits increase by holding undervalued currencies and currencies of countries with strong current accounts and international investment positions.

Original paper – Download PDF

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Author

Gino Cenedese
Fulcrum Asset Management

Conclusion

In conclusion, “Safe Haven Currencies: A Portfolio Perspective” by Gino Cenedese presents a thought-provoking analysis of currency portfolios, unraveling their intricate dynamics and the pivotal role they play as hedging instruments in varying market conditions.

The paper illuminates the time-varying hedging benefits linked to currency characteristics, emphasizing the asymmetric correlations exhibited during bear and bull markets. Furthermore, it underscores the impact of regime shifts in financial markets, offering valuable insights into optimal portfolio selection across currency portfolios, particularly during bear markets.

The research advocates unwinding carry trade positions and embracing currency momentum as beneficial strategies for investors during such periods. Additionally, it highlights the diversification advantages inherent in holding undervalued currencies and currencies from countries with robust current accounts and international investment positions.

These findings not only enrich our understanding of portfolio optimization in foreign exchange markets but also furnish actionable insights for savvy strategic decision-making in currency portfolio management, amplifying the depth of knowledge in this domain.

Related Reading:

Predictability of Currency Carry Trades and Asset Pricing Implications

A Credit-Based Theory of the Currency Risk Premium

FAQ

Q1: What is the main focus of the research paper “Safe Haven Currencies: A Portfolio Perspective” by Gino Cenedese?

A1: The main focus of the research paper is to comprehensively explore the dynamics of currency portfolios, with a specific emphasis on their asymmetric correlations and their role as hedging instruments in different market conditions. The study delves into the nuanced hedging benefits of currency portfolios during bear and bull markets and investigates the relationship between currency characteristics and time-varying hedging benefits.

Q2: How does the paper highlight the asymmetric correlations exhibited by currency portfolios?

A2: The paper emphasizes that currency portfolios exhibit asymmetric correlations, providing different hedging benefits during periods of bear, volatile world equity markets compared to bull markets. It explores how these time-varying hedging benefits are contingent on currency characteristics.

Q3: What insights does the paper provide regarding optimal portfolio selection across currency portfolios during bear markets?

A3: The paper illustrates that during bear markets, optimal portfolio selection is influenced by regime shifts in financial markets. Specifically, investors are suggested to benefit by unwinding carry trade positions and following currency momentum. The study sheds light on the impact of regime shifts on strategic decision-making in currency portfolios.

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