TY - JOUR

T1 - Computing currency invariant indices with an application to minimum variance currency baskets

AU - Hovanov, N.V.

AU - Kolari, J.W.

AU - Sokolov, M.V.

PY - 2004

Y1 - 2004

N2 - This paper provides an exact and computable invariant currency value index (ICVI) which is independent of base currency choice. Thus, given a fixed set of currencies, the index of a currency will have the same value, regardless of base currency choice. This currency index can be used as an indicator to assess movements of an individual currency's value in world currency markets. The methodological and mathematical reasoning behind ICVI is formulated in terms of a simple exchange model (SIMEX). To demonstrate one possible application we employ ICVI to construct a currency basket of minimum variance. Utilizing a quadratic optimization framework, we compute optimal weights for currencies and construct a stable aggregate currency (SAC). Comparative empirical analyses of a five-currency SAC and the IMF's Special Drawing Rights (SDR) demonstrates that the SAC has lower volatility and lower correlations with its components than the SDR. In a similar way it is shown that a three-currency SAC has a smaller variance th

AB - This paper provides an exact and computable invariant currency value index (ICVI) which is independent of base currency choice. Thus, given a fixed set of currencies, the index of a currency will have the same value, regardless of base currency choice. This currency index can be used as an indicator to assess movements of an individual currency's value in world currency markets. The methodological and mathematical reasoning behind ICVI is formulated in terms of a simple exchange model (SIMEX). To demonstrate one possible application we employ ICVI to construct a currency basket of minimum variance. Utilizing a quadratic optimization framework, we compute optimal weights for currencies and construct a stable aggregate currency (SAC). Comparative empirical analyses of a five-currency SAC and the IMF's Special Drawing Rights (SDR) demonstrates that the SAC has lower volatility and lower correlations with its components than the SDR. In a similar way it is shown that a three-currency SAC has a smaller variance th

KW - Currency index

KW - Currency basket

KW - Minimal variance

KW - Numeraire

KW - International finance

KW - World money

M3 - Article

VL - 28

SP - 1481

EP - 1504

JO - Journal of Economic Dynamics and Control

JF - Journal of Economic Dynamics and Control

SN - 0165-1889

IS - 8

ER -