Testing the stationarity of the variance-covariance matrix of currency returns

Date

1994

Author

Papaioannou, Michael G.
Temel, Tuğrul
Rajpal, Neeraj

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A statistic is developed to test the common assumption of asset allocation theory that the variance-covariance matrix of returns on different currency-assets, including the SDR, is stationary. The statistic is based on asymptotic theory and it reduces the covariance matrix to a vector, which is easily tractable in terms of hypothesis testing. Application of this test statistic to fixed-income returns, for various currency-based investors and for different intervals over the period 1982-1990, shows that the variances and covariances of currency returns change with time, implying that investment managers should frequently update the risk estimates of their portfolios to attain optimal choices.

URI

https://hdl.handle.net/11511/108238

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Department of Economics, Article