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Strategic foreign reserves risk management: Analytical framework

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  • Stijn Claessens
  • Jerome Kreuser

Abstract

We present an analytical framework for active foreign exchange reserves management that integrates risk-return objectives with macroeconomic, macro-prudential and sovereign debt management concerns. Our framework allows for very general objective functions, does not restrict the class of eligible stochastic processes or limit the investment universe, and can incorporate many types of macroeconomic concerns. It incorporates several kinds of risk constraints in order to obtain benchmarks satisfying possible central bank requirements of safety, liquidity, returns, and stability. Feedback between outcomes and decisions is easy using tools that reshape distributions and functions of the outcomes. And the model can be run on a PC-based platform. We apply the framework to several common reserves management problems focusing especially on the formulation of model equations, generation of trees and estimation of density functions of outcomes. We compare our approach to those used by many central banks and discuss advantages to our approach. Copyright Springer Science+Business Media, LLC 2007

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  • Stijn Claessens & Jerome Kreuser, 2007. "Strategic foreign reserves risk management: Analytical framework," Annals of Operations Research, Springer, vol. 152(1), pages 79-113, July.
    • Handle: RePEc:spr:annopr:v:152:y:2007:i:1:p:79-113:10.1007/s10479-006-0124-6
    DOI: 10.1007/s10479-006-0124-6
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    Cited by:

    1. Mateane, Lebogang, 2020. "Risk preferences, global market conditions and foreign debt: Is there any role for the currency composition of FX reserves?," EconStor Preprints 227484, ZBW - Leibniz Information Centre for Economics.
    2. Cangoz,Mehmet Coskun & Sulla,Olga & Wang,ChunLan & Dychala,Christopher Benjamin, 2019. "A Joint Foreign Currency Risk Management Approach for Sovereign Assets and Liabilities," Policy Research Working Paper Series 8728, The World Bank.
    3. Mr. Udaibir S Das & Miss Yinqiu Lu & Mr. Michael G. Papaioannou & Iva Petrova, 2012. "Sovereign Risk and Asset and Liability Management: Conceptual Issues," IMF Working Papers 2012/241, International Monetary Fund.
    4. André Amante & Phillip Anderson & Thordur Jonasson & Herman Kamil & Mr. Michael G. Papaioannou, 2019. "Sovereign Asset and Liability Management in Emerging Market Countries: The Case of Uruguay," IMF Working Papers 2019/290, International Monetary Fund.

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