A Sharpe-ratio-based measure for currencies

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Published: Jun 29, 2015

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Javier Prado-Dominguez
Universidad de A Coruña
Spain
Carlos Fernández-Herráiz
CAIA
Spain
Vol. 4 No. 1 (2015), Articles, pages 67-75
DOI: https://doi.org/10.17979/ejge.2015.4.1.4307
Submitted: Sep 24, 2018 Published: Jun 29, 2015
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Abstract

The Sharpe Ratio offers an excellent summary of the excess return required per unit of risk invested. This work presents an adaptation of the ex-ante Sharpe Ratio for currencies where we consider a random walk approach for the currency behavior and implied volatility as a proxy for market expectations of future realized volatility. The outcome of the proposed measure seems to gauge some information on the expected required return attached to the “peso problem”.

Keywords:

Sharpe Ratio, peso problem, carry trade, currency strategies.

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