Optimal common currency basket in East Asia

Abstract

This article employs the currency invariant index due to Hovanov et al. (2004) to construct an optimal or stable common G-3 currency basket across different groups of countries in East Asia. Calculated optimal weights show a larger weight for the US dollar but a nonnegligible role for the Japanese yen. The volatility of the optimal common G-3 currency basket is several times smaller than that of a similarly proposed common G-3 currency basket in East Asia.

Acknowledgement

I am grateful to James W. Kolari for helpful comments and suggestions received.

Notes

¹ In other words, the optimal weights that minimize the variance of a currency basket can be easily computed using familiar optimization methods for diversifying a portfolio of assets, e.g. Markowitz, 1959.

² The ASEAN 5 is comprised of Indonesia, Malaysia, Philippines, Singapore and Thailand.

³ It should be noted that the common G-3 currency basket weights of Williamson (2005) were obtained using nine East Asian countries, hence the comparison of the volatilities of the OCCB and Willamson common curreney Basket (WCCB) is justified on ex post facto grounds (see HKS, 2004).