Highlighting some of the issues with multicurrency numéraires

Michael Kunkler

Finance Research Letters, 2024, vol. 69, issue PB

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.

Keywords: Exchange rates; Multicurrency numéraires (search for similar items in EconPapers)
JEL-codes: F31 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:69:y:2024:i:pb:s1544612324012418

DOI: 10.1016/j.frl.2024.106212

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