Bibliographic description:
Kantsir Solomiia. A factor model for predicting exchange rate fluctuations. Bachelor Thesis. Ukrainian Catholic University, Faculty of Applied Sciences, Department of Computer Sciences. Lviv 2022, 39 p.
Abstract:
Weinvestigatetherelationshipbetweenriskandreturnsintheexchangeratemarket and propose a new statistical model for predicting currency returns using the
Instrumented Principal Component Analysis (IPCA) (Kelly, Pruitt, and Su, 2019).
Weshowthatthemodelwithtime-varyingloadingsandlatentfactorsoutperforms
the existingfactor-basedstrategiesin-sampleandout-of-sample.Specifically,the
four-factorIPCAmodelexplainsupto64%ofcurrencyreturnsvariation,whilethe
model withobservablefactorsshowstheperformanceof57%.Wehavefoundthat
the IPCAfactorsthatexplainthecross-sectionofcurrencyreturnsareglobalvolatil-
ity,carrytrade,dollar,andmomentum.Theresultsaretestedin-sampleandout-
sample and hold for individual currencies and managed portfolios.
