{
  "title": "Portfolio Performance of the SDR and Reserve Currencies: Tests Using the ArCH Methodology",
  "publication": "IMF Working Papers, February 1, 1993",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/30/portfolio-performance-of-the-sdr-and-reserve-currencies-tests-using-the-arch-methodology-1017",
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  "summary": "In managing their foreign exchange exposure, international investors, including central banks, often compare actual portfolios with hypothetical portfolios that have been calculated using certain assumptions regarding the statistical properties of interest rates and exchange rates.",
  "sections": [
    {
      "heading": "Summary",
      "content": "- Study tests the assumption that the variability of returns on various currency assets is time invariant.\n- Uses autoregressive conditional heteroskedastic (ARCH) models to evaluate time variation in variances of returns.\n- Data: weekly data for the period February 1982 to December 1991 for major reserve currencies, including the SDR.\n- Main finding: variances of returns do vary over time (i.e., they do not exhibit stationarity).\n- ARCH models that specify changing variances are superior to models that assume constant variance.\n- Error from incorrectly assuming stationarity is smaller with the SDR than with any other national currency in the portfolio to be managed."
    },
    {
      "heading": "Methodology",
      "content": "- Modeling approach: autoregressive conditional heteroskedastic (ARCH) models and comparisons with constant-variance specifications.\n- Data frequency and period: weekly data; February 1982 to December 1991.\n- Asset coverage: major reserve currencies, including the SDR."
    },
    {
      "heading": "Key Findings",
      "content": "- Evidence that variances of returns vary over time (nonstationary variance behavior).\n- ARCH-family models outperform constant-variance models for currency-return data in the sample period.\n- Mis-specifying constant variability leads to suboptimal currency-asset allocations and inaccurate measures of portfolio riskiness.\n- Relative robustness: the SDR exhibits smaller error from an incorrect stationarity assumption than any single national currency in the examined portfolio."
    },
    {
      "heading": "Policy and Practical Implications",
      "content": "- International investors and central banks should account for time-varying volatility when constructing and evaluating foreign exchange portfolios.\n- Using ARCH or ARCH-family specifications can improve risk measurement and asset-allocation decisions for fixed-income currency portfolios.\n- Inclusion of the SDR in reserve portfolios may reduce error arising from incorrect stationarity assumptions relative to relying solely on national currencies.\n\n---\n\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/30/portfolio-performance-of-the-sdr-and-reserve-currencies-tests-using-the-arch-methodology-1017"
    }
  ],
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    "[Markdown version](/en/publications/wp/issues/2016/12/30/portfolio-performance-of-the-sdr-and-reserve-currencies-tests-using-the-arch-methodology-1017/index.md)",
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    "Authors: Tugrul Temel, Michael G. Papaioannou",
    "Published: February 1, 1993",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781451842630.001",
    "Study tests the assumption that the variability of returns on various currency assets is time invariant.",
    "Uses autoregressive conditional heteroskedastic (ARCH) models to evaluate time variation in variances of returns.",
    "Data: weekly data for the period February 1982 to December 1991 for major reserve currencies, including the SDR.",
    "Main finding: variances of returns do vary over time (i.e., they do not exhibit stationarity).",
    "ARCH models that specify changing variances are superior to models that assume constant variance.",
    "Error from incorrectly assuming stationarity is smaller with the SDR than with any other national currency in the portfolio to be managed.",
    "Modeling approach: autoregressive conditional heteroskedastic (ARCH) models and comparisons with constant-variance specifications.",
    "Data frequency and period: weekly data; February 1982 to December 1991.",
    "Asset coverage: major reserve currencies, including the SDR.",
    "Evidence that variances of returns vary over time (nonstationary variance behavior).",
    "ARCH-family models outperform constant-variance models for currency-return data in the sample period.",
    "Mis-specifying constant variability leads to suboptimal currency-asset allocations and inaccurate measures of portfolio riskiness.",
    "Relative robustness: the SDR exhibits smaller error from an incorrect stationarity assumption than any single national currency in the examined portfolio.",
    "International investors and central banks should account for time-varying volatility when constructing and evaluating foreign exchange portfolios.",
    "Using ARCH or ARCH-family specifications can improve risk measurement and asset-allocation decisions for fixed-income currency portfolios.",
    "Inclusion of the SDR in reserve portfolios may reduce error arising from incorrect stationarity assumptions relative to relying solely on national currencies."
  ],
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