Currency Market Portfolio Constructions Based on Purchasing Power Parity Strategy and Refinement

Abstract

Purchasing power parity is a powerful way to measure the currency value of different countries or regions. This strategy has been widely used in forecasting financial foreign exchange markets. Through purchasing power parity's evaluation of the value of currency, we have designed a foreign exchange investment strategy to predict whether to buy currency. We hope that PPP through simulated trading tests will become a good foreign exchange strategy and more people can make profits in foreign exchange market through purchasing power parity strategy. We tested the data of G20 countries from 1999 to 2019, and simulated trading whether these countries’ currencies can be profitable under the purchasing power parity strategy. Through simulated trading tests, emerging markets have performed poorly, and developed markets have performed better than emerging markets. In the developed market, most of the simulated trading has made profits, while the emerging markets all show a loss. Through the stimulation, we believe that purchasing power parity is not a good foreign exchange trading strategy.