Eric Girardin (Aix-Marseille University) and Elena Sudyko (University of Evry) - A Higher-Moment Model of Financial Dollarization with Application to Russia
Spikes in deposit dollarization, generally associated with crisis episodes, are a challenge for existing models which disregard the stylized fact that, during such times, investors are particularly averse to asymmetric distributions and fat tails. While it is well accepted that adding higher moments to the minimum-variance portfolio enables a better modelling of portfolio choice, modelling of deposit dollarization still relies on the mean-variance model. We construct the first theoretical time-varying mean-variance-skewness-kurtosis model of financial dollarization. Calibration shows that our portfolio-choice model with higher-moments is better able than either the mean-variance, or alternative, widely-used, quadratic models, to match the recurring surges in the level of deposit dollarization in Russia since the late 1990s.
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