## 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_

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## Bibliographic details
- Authors: Ewe-Ghee Lim
- Published: December 1, 2007
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451868562.001

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### 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.

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/do-reserve-portfolios-respond-to-exchange-rate-changes-using-a-portfolio-rebalancing-21504_