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Is an Optimal Currency Area an Optimal Portfolio?

Madigan, James LU (2011) NEKM03 20111
Department of Economics
Abstract
This paper will analyze the construction of an optimal currency area using mean
variance portfolio analysis, in order to determine what would have been the
most stable monetary union for the European Union prior to the complete
transition to the Euro currency on January 1, 2002. The analysis calculates the
minimum variance portfolio of the potential European Union members by using
there sovereign bond yield to maturity as a proxy for the return and variance of
the asset. The mean variance model used was subject to variable upper and
lower bound constraints of the portfolio weights, that dependant on the size of
the country’s GDP to total GDP of the portfolio.
The data obtained from the calculation of the efficient minimum variance... (More)
This paper will analyze the construction of an optimal currency area using mean
variance portfolio analysis, in order to determine what would have been the
most stable monetary union for the European Union prior to the complete
transition to the Euro currency on January 1, 2002. The analysis calculates the
minimum variance portfolio of the potential European Union members by using
there sovereign bond yield to maturity as a proxy for the return and variance of
the asset. The mean variance model used was subject to variable upper and
lower bound constraints of the portfolio weights, that dependant on the size of
the country’s GDP to total GDP of the portfolio.
The data obtained from the calculation of the efficient minimum variance
portfolios indicates that the Eurozone did not form an optimal currency area that
provided the most stability. The analysis also determined that Greece, Portugal,
and Ireland were the countries that were most frequently left out of the optimal
minimum variance portfolio, implying that they could contribute to instability
within the optimal currency area. Even though the data period is from 1993
until 2001 this analysis accurately represents potential countries that would
cause instability within the currency union, currently seen in the 2010/2011
sovereign debt crisis. (Less)
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author
Madigan, James LU
supervisor
organization
alternative title
Mean Variance Analysis of the Eurozone
course
NEKM03 20111
year
type
H1 - Master's Degree (One Year)
subject
keywords
Eurozone, Euro, Portfolio Optimization, Optimal Currency Area, MVP Portfolio
language
English
id
1976345
date added to LUP
2011-09-15 10:09:10
date last changed
2011-09-15 10:09:10
@misc{1976345,
  abstract     = {This paper will analyze the construction of an optimal currency area using mean
variance portfolio analysis, in order to determine what would have been the
most stable monetary union for the European Union prior to the complete
transition to the Euro currency on January 1, 2002. The analysis calculates the
minimum variance portfolio of the potential European Union members by using
there sovereign bond yield to maturity as a proxy for the return and variance of
the asset. The mean variance model used was subject to variable upper and
lower bound constraints of the portfolio weights, that dependant on the size of
the country’s GDP to total GDP of the portfolio.
The data obtained from the calculation of the efficient minimum variance
portfolios indicates that the Eurozone did not form an optimal currency area that
provided the most stability. The analysis also determined that Greece, Portugal,
and Ireland were the countries that were most frequently left out of the optimal
minimum variance portfolio, implying that they could contribute to instability
within the optimal currency area. Even though the data period is from 1993
until 2001 this analysis accurately represents potential countries that would
cause instability within the currency union, currently seen in the 2010/2011
sovereign debt crisis.},
  author       = {Madigan, James},
  keyword      = {Eurozone,Euro,Portfolio Optimization,Optimal Currency Area,MVP Portfolio},
  language     = {eng},
  note         = {Student Paper},
  title        = {Is an Optimal Currency Area an Optimal Portfolio?},
  year         = {2011},
}