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

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).