Ranking, Risk-Taking and Effort: An Analysis of the ECB’s Foreign Reserves Management

Scalia, Antonio; Sahel, Benjamin

doi:10.2139/ssrn.2014843

Cited by 8 publications

(4 citation statements)

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“…This story, however, requires that unexpected interest‐based losses contemporaneously increase the incentive to hedge against further losses. The findings of Scalia and Sahel (), though, suggest that foreign reserve managers tend to respond to poor current year performance by increasing their exposure to selected risks.…”

Section: Discussionmentioning

confidence: 99%

“…Dominguez et al . (), Scalia and Sahel (), and Dominguez, Fatum and Vacek () are recent advances. The extant papers, in contrast to ours, generally abstract from the use of derivatives by Central Banks.…”

Section: Related Literaturementioning

confidence: 99%

“…For example, Scalia and Sahel (, p. 1) document “the existence of risk‐shifting behavior by (European Central Bank or ECB‐linked) reserve managers related to their year‐to‐date ranking: interim losers increase relative risk in the second half of the year, in the same way as mutual fund managers.” These authors show that those managers' risk‐taking incentives are magnified by the annual frequency of reports to the ECB Governing Council and, consequently, the nature of the managers' reputational reward structure. More generally, Remolona and Schrijvers (, p. 97) argue that, in an environment “of historically low yields on highly‐rated government securities, Central Bank reserves managers seek instruments with higher yields in an effort to enhance returns.”…”

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Foreign Central Bank Activities in US Futures Markets

Fishe

Robe

Smith

2014

Journal of Futures Markets

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We analyze the daily positions of 31 foreign Central Banks in US interest rate futures markets between 2003 and 2011 for targeted hedging or informed profit‐making decisions. Central Bank positions before the financial crisis of 2007–2009 are consistent with hedging some underlying balance sheet exposure. During and after the crisis, the pattern suggests an attempt to enhance returns. In particular, Central Banks held and profited from directional positions in 5‐ and 10‐year T‐Note futures in a manner indicative of a non‐hedging strategy. We also examine whether Central Bank position changes are synchronized in the sense that they tend to occur simultaneously. We identify differences before and after the onset of the financial crisis: Euro‐linked Central Banks become more synchronized, whereas non‐European Central Banks show no significant change during the crisis. We document that Central Bank positions generally account for a small fraction of the overall size of the futures markets, so it is unlikely that these institutions' goal is to influence US interest rates. © 2014 Wiley Periodicals, Inc. Jrl Fut Mark 36:3–29, 2016

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Section: Discussionmentioning

confidence: 99%

Section: Related Literaturementioning

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Foreign Central Bank Activities in US Futures Markets

Fishe

Robe

Smith

2014

Journal of Futures Markets

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“…Some factors make the investment contest of the ECB's reserve managers extremely challenging (Scalia and Sahel, 2012). First, while private bond funds often lack formal benchmarks, in our case the benchmark is tailor-made by the ECB to reflect its risk-return preferences and is actively managed, since the ECB may revise it based on the flow of new information on a monthly basis.…”

Section: Introductionmentioning

confidence: 99%

Market Timing and Performance Attribution in the ECB Reserve Management Framework

Potente

Scalia

2016

SSRN Journal

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We study the performance of a group of foreign exchange reserve managers that are responsible for investing the ECB's official reserves in US dollars, for a value of around $43 billion, using a new dataset which includes detailed portfolio holdings from 2006 to 2010. The ECB reserve managers display a positive ability at security selection overall. Two portfolio managers show market timing ability after adjusting for the non-linearity of the benchmark returns. For one portfolio manager, market timing ability is significantly related to the efficient use of public information. To pin down market timing, we develop a performance attribution model which identifies the contribution of the key portfolio managers' strategies (duration, curve, and spread). We find that, among the active layers, the spread contribution seems the most significant; curve and duration bets, with some exceptions, have generally provided little value added. Our analysis supports the view that portfolio managers adopt diversified investment styles. This may explain the non-negligible result of the aggregate reserve portfolio, averaging 10 basis points on an annual basis, net of transaction costs. The more diversified the investment styles are, the more likely it is that portfolio managers make independent bets, which in turn may positively affect the risk-adjusted return of the aggregate portfolio.

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