Optimal combination of currency strategies

This paper handles the portfolio problem of combining optimally different currency strategies in the presence of return predictability. After transaction costs, our in-sample and out-of-sample empirical results confirm the relevance of considering state variables like FX volatility and the CRB industrial return or yield curve related variables to accurately time the currency carry trade and the dollar carry trade. An optimal combination of currency strategies and the use of risk management of the optimal portfolios also allows the investor to increase their Sharpe ratio and certainty equivalent, compared to an optimal portfolio of traditional assets.