'ECU as a currency basket: an approach of Markowitz's portfolio theory'

We are on the threshold of the Economic and Monetary Union (EMU) in Europe. According to what is planned, for January of 1999 the up-to-date European Currency Unit (ECU) will no longer be the currency basket of the European Community to change into the 'Euro', the UEM single currency. In consequence, the ECU employed in a great number of private financial transactions will disappear from the international financial markets. Thus, we will loose a tool for ready-made portfolio diversification, in order to decrease the currency risk. The purpose of this paper is to analyse the role of the ECU as an efficient currency basket, so we will base our investigation on the Markowitz's portfolio theory. The period under investigation is 1989-1996, divided into two stages: before and after the European Monetary System crisis in 1992. Likewise, the methodology applied gives us an important instrument for the analysis of alternative currency portfolios efficiency in a return-risk framework.