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Uncertainty and Portfolio Dollarization. The Argentine Case in the Last Half Century

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  • Tamara Burdisso

    ()
    (BCRA, UBA, UNLP)

  • Eduardo Ariel Corso

    ()
    (BCRA, UBA)

Abstract

The aim of this document is to quantify the effects of uncertainty over financial assets dollarization of the Argentine non financial private sector. Our main concern is to illustrate to what extent uncertainty affects the degree of substitution between assets denominated in local and foreign currencies. Using the optimal portfolio selection theory combined with the multivariate GARCH methodology in order to estimate a model with heteroskedastic covariance matrix, we are able to estimate the efficient frontier of portfolio combination that the private sector faced. Besides, we calculate the optimal demands for dollar denominated assets for each of the monetary experiences identified for the period 1963-2009. The main conclusions of the paper are the following: (i) from the point of view of mean-variance incentives, the “Rodrigazo” of June 1975 was a turning point in dollarization of the portfolio of the non financial private sector; (ii) during the Convertibility regime, agents perceived assets denominated in local currency and in US dollars as perfect substitutes, which was reflected in incentives to dollarize around 50% of the portfolio; (iii) during 2003-2009, the degree of dollarization should have been lower than observed. This might suggest that agents consider in their decisions other features which have not been captured by our approach, such as transaction costs of building up and unwinding asset holdings, and the consideration of higher moments (skew and kurtosis).

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Bibliographic Info

Article provided by Central Bank of Argentina, Economic Research Department in its journal Ensayos Económicos.

Volume (Year): 1 (2011)
Issue (Month): 63 (July - September)
Pages: 41-95

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Handle: RePEc:bcr:ensayo:v:1:y:2011:i:63:p:41-95

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Related research

Keywords: Argentina; optimal portfolio choice; dollarization; MGARCH models;

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References

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  1. BAUWENS, Luc & LAURENT, Sébastien & ROMBOUTS, Jeroen VK, . "Multivariate GARCH models: a survey," CORE Discussion Papers RP -1847, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Søren Tolver Jensen & Anders Rahbek, 2004. "Asymptotic Normality of the QMLE Estimator of ARCH in the Nonstationary Case," Econometrica, Econometric Society, vol. 72(2), pages 641-646, 03.
  3. Courakis, Anthony S, 1989. "Does Constant Relative Risk Aversion Imply Asset Demands That Are Linear in Expected Returns?," Oxford Economic Papers, Oxford University Press, vol. 41(3), pages 553-66, July.
  4. Robert Engle, 2001. "GARCH 101: The Use of ARCH/GARCH Models in Applied Econometrics," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 157-168, Fall.
  5. Eric Jondeau & Michael Rockinger, 2006. "Optimal Portfolio Allocation under Higher Moments," European Financial Management, European Financial Management Association, vol. 12(1), pages 29-55.
  6. Gianni De Nicoló & Patrick Honohan & Alain Ize, 2003. "Dollarization of the Banking System," IMF Working Papers 03/146, International Monetary Fund.
  7. Benoit Mandelbrot, 1963. "The Variation of Certain Speculative Prices," The Journal of Business, University of Chicago Press, vol. 36, pages 394.
  8. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
  9. De Nicolo, Gianni & Honohan, Patrick & Ize, Alain, 2003. "Dollarization of the banking system : good or bad?," Policy Research Working Paper Series 3116, The World Bank.
  10. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-31, February.
  11. Jensen, S ren Tolver & Rahbek, Anders, 2004. "Asymptotic Inference For Nonstationary Garch," Econometric Theory, Cambridge University Press, vol. 20(06), pages 1203-1226, December.
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