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

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  • Christoffersen, Peter F
  • Giorgianni, Lorenzo

Abstract

We use a time series modeling approach to address two related questions of interest to foreign-exchange market participants and policy makers dealing with basket currencies. First, how are unknown weights appropriately extracted from basket currencies? Second, how does one correctly account for the risk--in terms of conditional variance of expected profits--that time-varying weights add to the standard basket-hedge position? We suggest a methodology that can provide answers to these questions and apply it to the heavily traded Thai baht currency basket.

Suggested Citation

  • Christoffersen, Peter F & Giorgianni, Lorenzo, 2000. "Interest-Rate Arbitrage in Currency Baskets: Forecasting Weights and Measuring Risk," Journal of Business & Economic Statistics, American Statistical Association, vol. 18(2), pages 242-253, April.
    • Handle: RePEc:bes:jnlbes:v:18:y:2000:i:2:p:242-53
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    Cited by:

    1. Carsten Trenkler & Pentti Saikkonen & Helmut Lütkepohl, 2008. "Testing for the Cointegrating Rank of a VAR Process with Level Shift and Trend Break," Journal of Time Series Analysis, Wiley Blackwell, vol. 29(2), pages 331-358, March.
    2. Robin L. Lumsdaine & Eswar S. Prasad, 2003. "Identifying the Common Component of International Economic Fluctuations: A New Approach," Economic Journal, Royal Economic Society, vol. 113(484), pages 101-127, January.
    3. Danilo Mercurio & Costanza Torricelli, 2003. "Estimation and arbitrage opportunities for exchange rate baskets," Applied Economics, Taylor & Francis Journals, vol. 35(15), pages 1689-1698.
    4. Imad Moosa, 2011. "The profitability of interest arbitrage when the base currency is pegged to a basket," Review of Quantitative Finance and Accounting, Springer, vol. 37(3), pages 267-281, October.
    5. Christoffersen, Peter & Errunza, Vihang, 2000. "Towards a global financial architecture: capital mobility and risk management issues," Emerging Markets Review, Elsevier, vol. 1(1), pages 3-20, May.
    6. Moosa, Imad A., 2011. "Exchange Rate Regime Shift in Reaction to a Changing Environment: A Case Study of Kuwait - Modifiche del regime dei tassi di cambio a seguito di modifiche nelle condizioni del sistema: il caso del Kuw," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 64(2), pages 237-255.
    7. repec:hum:wpaper:sfb649dp2006-067 is not listed on IDEAS
    8. Moosa, Imad A., 2011. "Exchange Rate Regime Shift in Reaction to a Changing Environment: A Case Study of Kuwait - Modifiche del regime dei tassi di cambio a seguito di modifiche nelle condizioni del sistema: il caso del Kuw," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 64(2), pages 237-255.

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