Strategic foreign reserves risk management: Analytical framework |
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Authors: | Stijn Claessens Jerome Kreuser |
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Institution: | (1) Department of Economics and Econometrics, The University of Amsterdam, Amsterdam, Netherlands;(2) World Bank, Washington, DC, USA;(3) Centre for Economic Policy Research Fellow, London, United Kingdom;(4) The RisKontrol Group GmbH, Kramgasse 76, 3011, Bern, Switzerland |
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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. |
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Keywords: | Reserves management ALM Asset/liability Dynamic stochastic optimization |
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