Interest Rate Arbitrage in Currency Baskets : Forecasting Weights and Measuring Risk

Author/Editor:

Peter F. Christoffersen ; Lorenzo Giorgianni

Publication Date:

January 1, 1999

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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).

Series:

Working Paper No. 99/16

English

Publication Date:

January 1, 1999

ISBN/ISSN:

9781451843385/1018-5941

Stock No:

WPIEA0161999

Format:

Paper

Pages:

30

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