Do Reserve Portfolios Respond to Exchange Rate Changes Using a Portfolio Rebalancing Strategy? An Econometric Study Using COFER Data
IMF Working Papers, December 1, 2007
Source details
- Canonical URL
- Do Reserve Portfolios Respond to Exchange Rate Changes Using a Portfolio Rebalancing Strategy? An Econometric Study Using COFER Data
Other formats
Bibliographic details
- Authors: Ewe-Ghee Lim
- Published: December 1, 2007
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451868562.001
Summary and main findings
- Research question: Tests whether reserve portfolios respond to exchange rate changes with a portfolio rebalancing strategy, which requires the purchase of depreciating currencies and sale of appreciating ones.
- Primary empirical findings:
- The paper finds empirical support for the portfolio rebalancing strategy.
- Dollar depreciation/appreciation results in rebalancing switches vis-a-vis the other major reserve currency, the euro.
- Valuation changes in the minor currencies tend to result in switches among themselves.
- Interpretation:
- Currency diversifications in response to exchange rate changes have thus far tended to be stabilizing for exchange markets.
- The findings help explain the relative stability of reserve currency shares.
Methodology and scope (as described)
- Data source: COFER (Currency Composition of Official Foreign Exchange Reserves) data.
- Approach: Econometric testing of reserve portfolio responses to exchange rate changes, interpreted through a portfolio rebalancing strategy framework.
Policy-relevant implications
- Stabilizing effect: Observed rebalancing behavior implies that reserve managers’ currency diversifications have contributed to exchange market stability.
- Understanding reserve currency shares: The rebalancing behavior provides an explanation for the relative stability of reserve currency shares over time.