Research on a multiplier effect between diversification of investment currencies in the European financial markets and concentration of vehicle currency into the Deutsche Mark

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The Deutsche Mark became the European vehicle currency about 1990, getting rid of the US Dollar. This facr was proven by reports of some central banks in the European Union and by several field works done by some Japanese researchers in foreign exchange markets in Western Europe in the beginning of 1990s. In the interviews with foreign exchange dealers, stability of foreign exchange rates between EMS currencies is a very important factor which drove the Deutsche Mark, the key currency of the EMS,into the vehicle currency in Europe. As is known, a bid-ask spread of a currency in the interbank foreign exchange markets is a key factor foreign exchange dealers decide a vehicle currency. A bid-ask spread is proportional to transaction volume of a currency in the markets and disproportional to volatility of a currency. So it is clear that the stability of foreign exchange rates in the EMS can explain only one factor, namely scarce volatility between the D.Mark and other EMS currencies. The o … More ther factro, namely increasing transaction volume of the D.Mark, must be investigated.This research formulated a kind of multiplier effect between "diversification" and "concentration"in the foreign exchange markets and crossborder financial markets. The diversification of investment currencies in the European financial markets has developed with the liberalization of exchange controls in the process of the completion of the internal market in the EC.European governments issued huge amount of bonds and the institutional investors have invested and transacted them on the crossborder base. The crossborder transactions of the international institutional investors accompany huge amounts of foreign exchange transactions. The scarce volatility of the D.Mark and other EMS currencies lowered the bid-ask spread of the D.Mark and the currency was selected as the vehicle currency in the European interbank markets. The D.Mark substituted the US dollar whose volatility was huge in the latter half of 1980s. Though Frankfurt foreign exchange market had faults, London market substituted for it as the center of foreign exchange transactions.In this manner, the "diversification"and "concentration" took place together and multiply each other. Less