Extensive empirical evidence documents relatively consistent if modest predictability in excess bond returns and excess currency returns.
The theory that active investors’ ability to add value on a risk-adjusted basis is proportional to their forecasting skill motivates the authors to extend empirical forecasting models to new sorts of trades-curve steepness positioning, and cross-country spread trading.
The authors test the performance of increasingly complex trading strategies between 1992 and 2002, from using single indicators to predict specific trades, to pooling indicators into one forecasting model for each trade, and then to diversify across several trades.
The broad composites produce the best risk-adjusted performance. One may gain an edge from the limited ability to forecast returns and magnify this edge through diversification across strategies.
The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.