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.
Keywords Reserves management . ALM . Asset/liability . Dynamic stochastic optimizationCentral bank foreign exchange reserves risk management concerns balancing many objectives and issues, from broad macro-economy policy objectives, such as monetary policy and foreign exchange management, to micro-aspects, such as the definition of portfolio benchmarks and the evaluation of investment managers. Furthermore, constraints arising from legal, human resources, asset markets, institutional and other aspects affect the actual achievability and implementation of reserves management objectives. While the macro-economic aspects S. Claessens
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.