Foreign Exchange Strategies Performance

Abstract

The objective of this research is to evaluate the performance and the efficiency of three common foreign exchange strategies: Carry Trade, the Momentum, the reversal and the Value strategy. The analyses take into account the transaction cost and the quotes of 52 currencies since 1983. The approach is similar to the Barroso and Santa Clara (2012), however as added value it includes a restriction on the leverage and returns of the portfolio allowing the inheritance of the position in a currency for the previous period. Although the use of the genetic algorithm is computationally more expensive than other numerical methods, it produces consistent results. The results suggest that foreign exchange strategies contain information relevant to the optimization of portfolios, in particular the Carry Trade and the Momentum. However, the performance of the portfolio in high volatility periods could be improved using other characteristics that incorporate the volatility such as the Sharp or the Sortino ratios.