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Highlighting some of the issues with multicurrency numéraires

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  • Kunkler, Michael

Abstract

Multicurrency numéraires are weighted baskets of currencies, in which the weights are positive and sum to one. Some popular multicurrency numéraires are: trade-weighted, the IMF's Special Drawing Right (SDR), equally-weighted, risk-weighted, and GDP-weighted. But which multicurrency numéraire should be used to model systems of currencies? This paper highlights some of the issues that arise when using multicurrency numéraires by utilising two conditions, namely, a consistency condition and a no-arbitrage condition. It is shown that both the consistency condition and the no-arbitrage condition are satisfied by common equally-weighted multicurrency numéraires. As a consequence, it is recommended that common equally-weighted multicurrency numéraires be used to model systems of currencies.

Suggested Citation

  • Kunkler, Michael, 2024. "Highlighting some of the issues with multicurrency numéraires," Finance Research Letters, Elsevier, vol. 69(PB).
    • Handle: RePEc:eee:finlet:v:69:y:2024:i:pb:s1544612324012418
    DOI: 10.1016/j.frl.2024.106212
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    References listed on IDEAS

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    More about this item

    Keywords

    Exchange rates; Multicurrency numéraires;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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