Abstract: This study explores the dynamics of deposit dollarization surges, a phenomenon that challenges conventional minimum-variance portfolio models. We introduce a Mean-Variance-Skewness-Kurtosis Portfolio (MVSKP) framework that incorporates higher-order moments of inflation and exchange rate depreciation, recognizing investors’ aversion to asymmetric risks and fat-tailed distributions. Using a Markov regime-switching model applied to Russian banking sector data (1998–2021), we identify three distinct regimes: stable deposit dollarization, declining deposit dollarization, and deposit dollarization during surges. Our findings highlight the limitations of traditional mean-variance models in capturing abrupt shifts in deposit dollarization and demonstrate the critical role of skewness and kurtosis. These findings provide critical insights into the determinants of financial dollarization and offer policy implications for mitigating its destabilizing effects.
