Reserve Portfolio Research Articles

Diversification Effect of Gold as an Asset Class in Foreign Exchange Reserve Portfolio, Evidence from Sri Lanka

Foreign Exchange Reserves of the countries play a major role in managing exchange rate and monetary policy, particularly in emerging countries as Sri Lanka. Therefore, it is important to manage foreign exchange reserves in an open and transparent manner with clear objectives of what is going to be achieved. For a country like Sri Lanka the main objective would be the safety of the assets since it is difficult to absorb substantial risks in managing foreign exchange reserves due to relative lower size compared to its exposure to external sector of the economy. When it comes to gold as an assets class is considered to safe-haven assets due to its nature of higher return in times of crisis and inflationary periods. The objective of this study is to explore the diversification impact of gold on foreign exchange reserves in Sri Lanka for the period from 2007 to 2023. To explore the impact of diversification, correlation between gold and existing foreign exchange reserves and additional excess return per unit of risk provide with the inclusion of gold into the portfolio were used to analyze the possible diversification impact. The results showed that there is an increase in excess return with the addition of 1% to 5% of gold as a percentage of total foreign exchange reserves, while correlation of gold with existing portfolio was less than 0.5 indicating diversification impact. Further, the Sharpe ratio was also seen increasing when the gold composition in foreign exchange reserve portfolio was increased. It was found that gold can be considered as an asset class which help diversification for foreign exchange reserves of Sri Lanka, even though the same are managed in very conservatively.

Integration of Sustainable Investments in the Management of Foreign Reserves Held by Central Banks

Motivated by both risk considerations, such as the impact of climate changes on asset prices, and the desire to support sustainable investments that contribute to global environmental goals, central banks are stepping towards the integration of sustainable investments in their Foreign Reserves management activity. This can be performed explicitly or implicitly, via a series of channels, such as the investment in labelled bonds, or the intertion of ESG metrics at portofolio level (e.g. portfolio carbon footprint). In the case of central banks, in general, the goal of sustainability can be integrated into the activity of managing reserves, without jeopardizing security and efficiency. The security and yield of green bonds support their incorporation into reserve portfolios, but some constraints could emerge in terms of accessibility and liquidity. Given the oversupply of green bonds in primary markets but reduced trading in secondary markets, the liquidity of green bonds may be limited, especially if investors keep these bonds to maturity. However, the persistence of excess demand should facilitate the sale of such assets, if necessary.

Currency internationalization with Chinese characteristics: Is capital‐account convertibility required for the renminbi to acquire reserve‐currency status?

AbstractIt is widely assumed that the renminbi (RMB) cannot acquire a meaningful place in central bank reserve portfolios without full liberalization of China's capital account. We argue that the RMB can in fact develop into an international reserve currency in the absence of capital‐account convertibility. Trade and investment links can drive use despite limited access to Chinese financial markets. But this route to currency internationalization requires policy support. China must provide access to RMB through loans and the People's Bank of China (PBoC) currency swaps. It must ensure the convertibility of RMB into US dollars in offshore markets. It must provide RMB services at a stable and predictable price. Currency internationalization without full capital‐account liberalization thus requires the RMB to be backed by dollar reserves, which the PBoC consequently will continue to hold and use. Hence, we do not foresee RMB internationalization as supplanting dollar dominance.

Green Bonds in the Policy of Management of Central Banks’ International Reserves

The article is devoted to the management of international reserves using green bonds, which makes it possible to ensure the priorities of sustainable development formulated by the UN. The authors aim to prove the possibility of using green bonds as alternative financial assets for placing the international reserves of countries pursuing a policy of de-dollarization. The authors conclude that the inclusion of these instruments in reserve portfolios ensures their necessary diversification, structure improvement, and risk reduction and increases the confidence of investors and creditors. Substantiation of the proposal to include green bonds, denominated in euros, in the Bank of Russia's portfolio of international reserve assets is an original contribution aimed at developing approaches to the management of international reserves, considering the existing realities.

ФАКТОРЫ ЭФФЕКТИВНОСТИ УПРАВЛЕНИЯ ПОРТФЕЛЯМИ ПЕНСИОННЫХ РЕЗЕРВОВ НЕГОСУДАРСТВЕННЫХ ПЕНСИОННЫХ ФОНДОВ

The article is devoted to the consideration of approaches and assessment of the efficiency of management of investment portfolios of non-state pension funds. This article is a logical continuation of the previously conducted research on assessing the effectiveness of pension savings management and contains an analysis of the effectiveness of the second component of investment portfolios of non-state pension funds (NPF) — pension reserves. The article examines the factors influencing the efficiency of managing the portfolios of pension reserves of non-state pension funds on the basis of statistical data on 28 NPFs for 2013–2018. The factors chosen were the volumes and growth rates of the funds attracted from pension reserves, the share of pension reserves in the economies of scale of non-state pension funds, the presence of risk strategies (the share of shares and investment units), and the amount of remuneration of management companies. The aim of the study is to assess the influence of the selected factors on the efficiency of managing the portfolio of pension reserves of NPFs based on the construction of econometric models. The construction of one-factor and multi-factor econometric models confirms the absence of dependence of the effectiveness of portfolios of pension reserves of APFs, determined by the Sharpe ratio, on the size of attracted pension reserves per one insured person; from the share occupied by NPFs in the non-state pension market, as well as from remuneration to management companies paid by non-state pension funds. The influence of the chosen investment strategy and the growth rate of pension reserves on the efficiency of managing pension reserves of NPFs is revealed.

Central Bank Governance and Reserve Portfolios Investment Policies: An Empirical Analysis

Central Bank Governance and Reserve Portfolios Investment Policies: An Empirical Analysis

Prospects and Directions of Development of the Non-State Pension Market of Russia

the subject of the article is the analysis of prospects and new directions of development of the non-state pension provision market in Russia. The article offers solutions for further development of this market segment. In particular, early non-state pension provision is being considered. The prospects and risks of introducing a guaranteed pension plan are analyzed. A comparative analysis of the main characteristics of these two pension products is carried out. As part of the expansion of the investment Declaration of the portfolio of pension reserves of non-state pension funds, their participation in infrastructure projects is analyzed.

Impact of External Debt on Nigeria’s Foreign Reserve Portfolios

This study examines the impact of external debt and external debt servicing on the international reserves of Nigeria. The theoretical underpinning of the study was anchored on dual gap theory and the self-insurance theory of external reserves. The after effect research design was adopted to examine the components of the study in retrospect. Historical data spanning 1981 to 2018 was collated from the World Development indicators and analyzed using the error correction mechanism as the unit of analyses and estimated employing the least square technique. The empirical findings indicate that external debt stock exert a negative and statistically significant impact on Nigeria’s foreign exchange reserve portfolios. It further emerged that external debt service payments exert a positive but statistically insignificant impact on the international reserves of Nigeria. The study concludes that external debt stock and external debt service payments has no significant impact on the international reserve portfolios of Nigeria. The study recommends that, the fiscal managers of Nigeria should exercise cushion in external borrowing in order to ensure that concomitant external debt service payments does not deplete the international reserves of the country.

Determinants of Currency Composition of Reserves: A Portfolio Theory Approach with an Application to RMB

The way central banks manage their foreign reserve assets has evolved over the past decades. One major trend is managing reserves in two or more tranches-liquidity tranche and investment tranche-especially for those with adequate reserves. Incorporating reserve tranching, we have developed in this paper a central bank's reserve portfolio choice model to analyze the determinants of the currency composition of reserves. In particular, we adopt the classical mean-variance framework for the investment tranche and the asset-liability framework for the liquidity tranche. Building onthese frameworks, the roles of currency compositions in imports invoicing and short-term external debt, and risk and returns of reserve currencies can be quantified by our structural model-a key contribution of our paper given the absence of structural models in the literature. Finally, we estimate the potential paths of the share of RMB in reserves under different scenarios to shed light on its status as an international currency.

Determinants of Currency Composition of Reserves: a Portfolio Theory Approach with an Application to RMB

The way central banks manage their foreign reserve assets has evolved over the past decades. One major trend is managing reserves in two or more tranches—liquidity tranche and investment tranche—especially for those with adequate reserves. Incorporating reserve tranching, we have developed in this paper a central bank’s reserve portfolio choice model to analyze the determinants of the currency composition of reserves. In particular, we adopt the classical mean-variance framework for the investment tranche and the asset-liability framework for the liquidity tranche. Building on these frameworks, the roles of currency compositions in imports invoicing and short-term external debt, and risk and returns of reserve currencies can be quantified by our structural model—a key contribution of our paper given the absence of structural models in the literature. Finally, we estimate the potential paths of the share of RMB in reserves under different scenarios to shed light on its status as an international currency.

UTILIZATION OF ECONOMIC ACTIVITIES TO IMPROVE THE MANAGEMENT OF WADI EL-RAYAN PROTECTED AREA

The aim of this study is to identify how economic activities can be used to improve the management of the Wadi El Rayan protected area, and to find the relationship between economic activities and increase the income allocated to protected areas to spend on various management activities in light of the lack of available financial resources. On natural resources for sustainable development. In order to achieve this, the researchers designed a questionnaire form distributed to a sample of 70 employees (officials, environmental researchers, employees, accountants and legal specialists) in Wadi El Rayyan and the Environmental Affairs Agency at the Ministry of Environment. The study found that the change in management improvement (dependent variable) by 39.2% was due to economic activities (independent variable) at a level of significance of (0.05).The study reached a number of recommendations, the most important of which is: that the resources of protected areas should be spent on the development of protected areas and reduce dependence on the government budget. As well as work on providing a portfolio of natural reserves to benefit from the available resources, after approval by the Board of Directors of the EEAA for public auctions or application through the Investment and Participation Unit of the Ministry of Finance. And coordination with ministries, agencies and concerned bodies on investment projects that can be implemented in the reserves. As well as work on the development of eco-tourism programs within the reserves to achieve self-financing and sustainable.

The Federal Reserve's Portfolio and its Effect on Interest Rates

We explore the historical composition of the Federal Reserve's Treasury portfolio and its effect on Treasury yields. Using data from 1985 to 2016, we show that the divergence of the composition of the Federal Reserve's portfolio from overall Treasury securities outstanding is associated with a statistically significant effect on interest rates. In aggregate, when the Federal Reserve's portfolio has shorter maturity than overall Treasury debt outstanding, measures of the term premium are higher at all horizons; likewise, when the Federal Reserve's portfolio has longer maturity, term premiums are lower. In addition, at the individual security level, differences in Federal Reserve holdings from overall Treasury debt outstanding are correlated with measures of pricing errors and liquidity premiums. We discuss the mechanism for this effect, which could include elements of preferred-habitat theory as well as the fiscal theory of the price level.

The Effect of the Federal Reserve’s Securities Holdings on Longer-term Interest Rates

In an effort to promote more accommodative financial conditions following the financial crisis of 2008 and the ensuing recession, and at a time when the conventional monetary policy tool--the federal funds rate--was at its effective lower bound, the Federal Reserve conducted large-scale asset purchases (LSAPs) and a maturity extension program (MEP). By increasing the amount of longer-term Treasury securities and agency MBS on the Federal Reserve's balance sheet, and thereby reducing the amount of longer-term Treasury securities and agency MBS that the public would have held otherwise, these purchase programs put downward pressure on longer-term interest rates. This note outlines a way to estimate by how much Federal Reserve securities holdings resulting from these purchase programs reduce longer-term interest rates. In particular, we estimate the term premium effect (TPE) on the 10-year Treasury yield. Currently, our model suggests that the cumulative effect of the Federal Reserve's LSAPs and MEP results in a reduction in the 10-year Treasury yield term premium of about 100 basis points. By the end of 2017, the term premium will be held down by about 85 basis points. The slight narrowing of the TPE reflects the average maturity of the Federal Reserve's portfolio declining and the cessation of reinvestments drawing nearer.

Foreign Exchange Reserves and Its Alternative Uses: Policy Prescription for India

The unprecedented surge in foreign exchange reserves (hereafter reserves) recently in the Asian economies has raised a concern for holding optimum reserves and its alternative uses. The objective of this paper is to identify the adequate and excess reserves, and to analyze the alternative possible ways for investing these excess reserves. Reserve adequacy has been explained by various ratio measures, and then excess reserves have been estimated based on basic thumb rules. The alternative use of excess reserves has been analyzed with the international experiences after discussing India's recent trend of utilizing its reserves. The ratio analysis suggests India has been accumulating excess reserves after meeting the basic economic needs. It is observed that, the major portion of India's reserves is invested in securities and showing an increasing trend. The portfolio of deposits with the other central banks has declined in recent years and diverted to investment in securities and deposits with foreign commercial banks. The analysis from cross-country experiences show that countries have broadly diversified their reserves into four basic portfolios: liquidity portfolio, investment portfolio, immunization portfolio and the oil revenue fund portfolio. India can follow these countries experiences and institute a special corporation for managing its growing reserves in various alternative channels like investment in financial institutions, real estate, new energy, stocks, and bonds and also in infrastructure development for enhancing economic growth and for efficient diversification of reserve portfolios.

Market Timing and Performance Attribution in the ECB Reserve Management Framework

We study the performance of a group of foreign exchange reserve managers that are responsible for investing the ECB’s official reserves in US dollars, for a value of around $43 billion, using a new dataset which includes detailed portfolio holdings from 2006 to 2010. The ECB reserve managers display a positive ability at security selection overall. Two portfolio managers show market timing ability after adjusting for the non-linearity of the benchmark returns. For one portfolio manager, market timing ability is significantly related to the efficient use of public information. To pin down market timing, we develop a performance attribution model which identifies the contribution of the key portfolio managers’ strategies (duration, curve, and spread). We find that, among the active layers, the spread contribution seems the most significant; curve and duration bets, with some exceptions, have generally provided little value added. Our analysis supports the view that portfolio managers adopt diversified investment styles. This may explain the non-negligible result of the aggregate reserve portfolio, averaging 10 basis points on an annual basis, net of transaction costs. The more diversified the investment styles are, the more likely it is that portfolio managers make independent bets, which in turn may positively affect the risk-adjusted return of the aggregate portfolio.

No Reservations: International Order and Demand for the Renminbi as a Reserve Currency

This study identifies 37 central banks that added China’s renminbi (RMB) to their reserve portfolio since 2010. Why do some states diversify into new reserve currencies at an early stage while most continue to take a wait-and-see approach? We argue that state preferences regarding international order influence decisions to invest in RMB. While some states support the liberal, US-led status quo, others prefer an emerging Chinese alternative order. We contend that as state preferences for international order move away from the US model (and toward China), the likelihood of diversifying reserves into RMB should increase. Thus, the decision to invest in RMB is not simply an economic choice. It is also a political act that signals and symbolizes a state’s preferences for a diminution of American global influence and support for a revised order. Employing new United Nations General Assembly (UNGA) ideal points data, we find that states with larger (smaller) ideal point distance with the United States (China) are more likely to adopt RMB as a reserve currency. Furthermore, political consideration—rather than economic concerns about transaction needs, optimal portfolio considerations, or instrumental calculations—best explains emergent demand for the RMB as a reserve currency.

What drives gold demand in central bank's foreign exchange reserve portfolio?

This study examines the determinants of gold demand in central bank's foreign exchange reserves portfolio by using a panel data set of over 100 nations for 1998–2014. I find gold's US dollar and inflation-hedge properties as well as higher exchange rate risk and monetary policy instability to significantly increase central bank's gold holdings while higher economic growth and financial development to reduce such share. Moreover, the recent global financial crisis caused central banks to increase this share. The results imply the rationale for holding gold in central banks’ reserves is actually not different than hedge fund managers or individual investors.

Should cryptocurrencies be included in the portfolio of international reserves held by central banks?

AbstractIn most countries, the central bank is required to hold reserve assets as a means of providing credibility for the value of the fiat currency. These assets can be in the form of gold, foreign exchange or some other internationally recognised reserve asset and are held to permit the country to engage in international transactions. Within recent years, cryptocurrencies have been increasingly utilised for international transactions, and it is possible that the use of these cryptocurrencies might expand in the future. This paper therefore examines the potential role of digital currency balances as part of the portfolio of external assets held by a central bank. Using the case of Barbados, the paper also provides a simulation of the effect holding some proportion of their asset-base would have had on the stability of the foreign reserves as well as the return on the portfolio of assets.

The Bagassi gold deposits on the eastern margin of the Houndé greenstone belt, Burkina Faso

The Bagassi gold deposits are situated on the West African craton and hosted in Palaeoproterozoic rocks of the Houndé greenstone belt, southwest Burkina Faso. High-grade gold mineralisation is hosted in quartz–gold±pyrite veins-lodes (V1A), in dilational zones and narrow shears in the Bagassi granitoid, and forms the majority of the resource–reserve portfolio in the Bagassi exploration permits, with gold grades of 18–21g/t. Shear hosted gold-pyrite mineralisation in quartz veins in dilational jogs (V1B) occurs along narrow discontinuous shear zones that trend north-northwest in Birimian-aged metabasaltic units, and forms a secondary gold resource. Gold mineralisation is restricted to formation in the late Eburnean Orogeny and formed during a change from east-west to transcurrent compression and shearing. The Bagassi deposits demonstrate that granitoids emplaced prior to onset of the Eburnean Orogeny represent viable gold mineralisation in host rocks that are increasingly seen to be associated with significant gold resources.

QE...Taper...? Does Post-Taper Policy Need a 'Big Bang' Return to Normalcy?

This paper examines quantitative easing’s effects upon the financial system and its subsequent impact upon the overall economy.QE’s transformation of the Federal Reserve’s balance sheet and the resulting portfolio risk are assessed as is the U.S. Treasury’s increased exposure to short-term interest rates. Corresponding growth in bank cash assets and their interaction with bank loans is analyzed.The QE program’s effects on the economy, including GDP growth, inflation and employment are evaluated. Weak effects upon nominal GDP growth and stronger effects on labor force participation are noted. Other relationships between QE and real GDP, inflation and unemployment were either insignificant or inconsistent. QE’s impact on GDP seems to occur via transmission mechanisms other than increased lending. For realizing the Fed’s objective of increasing employment, measures to increase lending appear more likely to succeed than continued QE purchases adding to already high levels of bank cash assets.A lengthy unwinding of QE extends exposure to risks for the Fed and U.S. government. Banking liquidity, Fed balance sheet soundness, and U.S. Treasury financial flexibility may be enhanced by recapitalizing Federal Reserve portfolio holdings with new Treasury securities to be distributed to banks in place of excess reserves.