XML

Seoul Journal of Economics - Vol. 24 , No. 4

[ Article ]
Seoul Journal of Economics - Vol. 24, No. 4, pp. 593-612
Abbreviation: SJE
ISSN: 1225-0279 (Print)
Print publication date 30 Nov 2011
Received 29 Jul 2011 Revised 21 Sep 2011 Accepted 28 Sep 2011

Mean-Variance Efficiency of Reserve Portfolios
Daehwan Kim ; Jaiwon Ryou
Assistance Professor, Department of Economics, Konkuk University, 1 Hwayang-Dong, Gwangjin-Gu, Seoul 143-701, Korea, Tel: +82-2-450-3937, Fax: +82-2-3437-6610 (dkim@konkuk.ac.kr)
Corresponding Author, Professor, Department of Economics, Konkuk University, 1 Hwayang-Dong, Gwangjin-Gu, Seoul 143-701, Korea, Tel: +82-2-450-3621, Fax: +82-2-3437-6610 (govjai@konkuk.ac.kr)

JEL Classification: F31, F33, G11


Abstract

This paper analyzes the mean-variance efficiency of the reserve portfolios of central banks in an effort to shed light on the recent debate regarding the need for portfolio diversification. Using likelihood ratio test statistics, we examine the efficiency of the reserve portfolios of 18 countries from 2000 to 2009. The null hypothesis of efficiency is rejected for approximately half of the countries. However, overall inefficiency appears to have decreased over time, particularly in those countries that previously had inefficient portfolio diversification. Along with the continued dominance of the US dollar in reserve portfolios, our findings suggest that the status of the US dollar as an international reserve currency did not decline.


Keywords: Reserve portfolio, Mean-variance efficiency, Liquid portfolio, Hedging portfolio

References
1. Beck, R., and Rahbari, E. Optimal Reserve Composition in the Presence of Sudden Stops. European Central Bank Working Paper Series No. 916, 2008.
2. Beck, R., and Weber, S. Should Larger Reserve Holdings Be More Diversified? European Central Bank Working Paper Series No. 1193, 2010.
3. Cadsby, C. B. “Performance Hypothesis Testing with the Sharpe and Treynor Measures: A Comment.” The Journal of Finance 41 (No. 5 1986): 1175-6.
4. Cooper, R. N. The Future of the Dollar. Peterson Institute for International Economics Policy Brief No. 09-21, 2009.
5. Eichengreen, B. “The Dollar Dilemma.” Foreign Affairs 88 (No. 5 2009): 53-68.
6. Gibbons, M. R., Ross, S. A., and Shanken, J. “A Test of the Efficiency of a Given Portfolio.” Econometrica 57 (No. 5 1989): 1121-52.
7. Jobson, J. D., and Korkie, B. M. “Performance Hypothesis Testing with the Sharpe and Treynor Measures.” The Journal of Finance 36 (No. 4 1981): 889-908.
8. Kandel, S. “The Likelihood Ratio Test Statistic of Mean-Variance Efficiency without a Riskless Asset.” Journal of Financial Economics 13 (No. 4 1984): 575-92.
9. Kim, Jeonghan, Lee, Yunsok, and Lim, Hyung-Joon. Cost of Managing Foreign Reserves and Estimation of the Required Size of Foreign Reserves. Korea Institute of Finance, VIP series 05, 2009.
10. Lee, Keun, Kim, Ginil, Kim, Hong Kee, and Song, Hong-Sun. “A New Macro-Financial System for a Stable and Crisis-resilient Growth in Korea.” Seoul Journal of Economics 23 (No. 2 2010): 145-86.
11. Lim, E. Do Reserve Portfolios Respond to Exchange Rate Changes Using a Portfolio Rebalancing Strategy? An Econometric Study Using COFER Data. IMF Working Paper No. 07-293, 2007.
12. Memmel, C. “Performance Hypothesis Testing with the Sharpe Ratio.” Finance Letters 1 (No. 1 2003): 21-3.
13. Putnam, B. H. Thoughts on Investment Guidelines for Institutions with Special Liquidity and Capital Preservation Requirements. In Risk Management for Central Bank Foreign Reserves. European Central Bank, 2004.
14. Roll, Richard. “A Critique of the Asset Pricing Theory’s Test.” Journal of Financial Economics 4 (No. 2 1977): 129-76.
15. Shanken, J. “Multivariate Tests of the Zero-Beta CAPM.” Journal of Financial Economics 14 (No. 3 1985): 327-48.
16. Stiglitz, Joseph E. “Lessons of the Global Financial Crisis of 2008.” Seoul Journal of Economics 23 (No. 3 2010): 321-39.
17. Truman, E. M., and Wong, A. The Case for an International Reserve Diversification Standard. Peterson Institute for International Economics Working Paper, 2006.
18. Wong, A. Measurement and Inference in International Reserve Diversification. Peterson Institute for International Economics Working Paper, 2007.
19. Wooldridge, P. D. “The Changing Composition of Official Reserves.” BIS Quarterly Review (September 2006): 25-38.