Cointegration-based optimisation of currency portfolios

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However, the relationship between currency pairs is much more difficult to ascertain than this and owes its links to complex market forces.

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Using the AFX Index as a benchmark for the portfolios was considered here. However, with the index being created in 1984, the currency weightings were no longer considered relevant for this investment horizon. Also, this index is created for ‘trend’ following portfolios and, as yet, there is no evidence to suggest that cointegrating currency portfolios are ‘trend’ followers.

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The results of these tests are not reproduced herein order to conserve space, but are available from the authors.

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The constituent weights for these portfolios are available on request from the authors.

We acknowledge that the Markowitz approach for portfolio optimisation could have been an option here, but as this is just a simple benchmark and not the main focus of this study, we feel this approach is suitable for this research.

The information ratio is the average annual return of an investment strategy divided by its annualised standard deviation.

The maximum drawdown is a measure of downside risk showing the maximum cumulative loss that could have been incurred on a portfolio.

While acknowledging that this is not the most ideal methodology for portfolio construction, the lack of data on this matter renders these assumptions necessary and is deemed an appropriate option for this research.