This project enhances the traditional carry trade strategy by implementing a dynamic volatility-based indicator. Using advanced GARCH models, the project optimizes returns and minimizes risk during volatile market conditions.
GARCH Model Estimation: The TARCH model was chosen for its effectiveness in modeling volatility asymmetry in G10 currencies. Indicator Implementation: A dual-layer volatility indicator adjusts portfolio exposure based on forecasted and realized volatility. Portfolio Reconstruction: Portfolios were reconstructed under the indicator, showing improved cumulative returns and Sharpe ratios.
The volatility-based indicator significantly enhances the carry trade strategy by improving risk-adjusted returns and stabilizing portfolio growth.