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

Author

Listed:
  • 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).

Suggested Citation

  • Tamara Burdisso & Eduardo Ariel Corso, 2011. "Uncertainty and Portfolio Dollarization. The Argentine Case in the Last Half Century," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(63), pages 41-95, July - Se.
  • Handle: RePEc:bcr:ensayo:v:1:y:2011:i:63:p:41-95
    as

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    References listed on IDEAS

    as
    1. 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 116-131, February.
    2. Eric Jondeau & Michael Rockinger, 2006. "Optimal Portfolio Allocation under Higher Moments," European Financial Management, European Financial Management Association, vol. 12(1), pages 29-55, January.
    3. 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, March.
    4. Bénédicte Vidaillet & V. D'Estaintot & P. Abécassis, 2005. "Introduction," Post-Print hal-00287137, HAL.
    5. Sébastien Laurent & Luc Bauwens & Jeroen V. K. Rombouts, 2006. "Multivariate GARCH models: a survey," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(1), pages 79-109.
    6. 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.
    7. 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.
    8. Benoit Mandelbrot, 2015. "The Variation of Certain Speculative Prices," World Scientific Book Chapters,in: THE WORLD SCIENTIFIC HANDBOOK OF FUTURES MARKETS, chapter 3, pages 39-78 World Scientific Publishing Co. Pte. Ltd..
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    More about this item

    Keywords

    Argentina; optimal portfolio choice; dollarization; MGARCH models;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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