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Modelling optimal strategies for the allocation of wealth in multicurrency investments |
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| Authors: | Costas Christou PAVB Swamy George S Tavlas |
| Institution: | aRoom 8-548, International Monetary Fund, 700 19th Street, N.W., Washington, DC 20431, USA;bFederal Reserve Board and Office of the Comptroller of the Currency, 250 E Street, S.W., Bank Research Division, Mail Stop 6-5, Office of the Comptroller of the Currency, Washington, DC 20219, USA;cRoom 7-210, International Monetary Fund, 700 19th Street, N.W., Washington, DC 20431, USA |
| Abstract: | This paper analyzes rates of return on financial assets denominated in five major currencies and provides a framework for the determination of optimal strategies for the allocation of wealth in multicurrency investments. Three models are estimated: a univariate autoregressive conditional heteroskedasticity (ARCH) model, an extended ARCH model using the random coefficient (RC) procedure, and a pure RC model. A comparison of the forecasts of these models with those generated by a random walk model demonstrates that forecasts based on the RC/extended ARCH procedure are superior to those based on the random walk model and those based on direct ARCH estimation. These results could be useful for both international investors for the allocation of their wealth among fixed-income investment securities and central banks for the management of their external reserve assets. |
| Keywords: | ARCH models Random coefficient models Forecasting Optimal portfolios |
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