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Liquidity management of foreign exchange reserves in continuous time

Author

Listed:
  • Zhang, Dewei
  • Wang, Yiqi
  • Wang, Jingjing
  • Xu, Weidong

Abstract

In order to cope with daily foreign currency exchange payments or trades and avoid liquidity crisis, central banks need to maintain the liquidity of foreign exchange reserves. In this paper, we develop a Foreign Exchange Reserves Liquidity Management (FERLM) model based on stochastic process by introducing a foreign exchange factor. We also generate a feasible target proportion of the liquidity reserve to total foreign exchange reserves, by seeking the balance between capital gains of holding foreign exchange reserves and losses of liquidity insufficiency.

Suggested Citation

  • Zhang, Dewei & Wang, Yiqi & Wang, Jingjing & Xu, Weidong, 2013. "Liquidity management of foreign exchange reserves in continuous time," Economic Modelling, Elsevier, vol. 31(C), pages 138-142.
    • Handle: RePEc:eee:ecmode:v:31:y:2013:i:c:p:138-142
    DOI: 10.1016/j.econmod.2012.11.053
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    References listed on IDEAS

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    1. Xavier Freixas & Jean-Charles Rochet, 2008. "Microeconomics of Banking, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062704, December.
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    3. Ringbom, Staffan & Shy, Oz & Stenbacka, Rune, 2004. "Optimal liquidity management and bail-out policy in the banking industry," Journal of Banking & Finance, Elsevier, vol. 28(6), pages 1319-1335, June.
    4. Dickson, David C. M. & Waters, Howard R., 1993. "Gamma Processes and Finite Time Survival Probabilities," ASTIN Bulletin, Cambridge University Press, vol. 23(2), pages 259-272, November.
    5. Coche, Joachim & Nyholm, Ken & Koivu, Matti & Poikonen, Vesa, 2006. "Foreign reserves management subject to a policy objective," Working Paper Series 624, European Central Bank.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Foreign exchange reserves; Liquidity management; Gamma process;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F3 - International Economics - - International Finance

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