Do Reserve Portfolios Respond to Exchange Rate Changes Using a Portfolio Re-balancing Strategy? An Econometric Study Using Cofer Data

24 Pages Posted: 31 Dec 2007

See all articles by Ewe-Ghee Lim

Ewe-Ghee Lim

International Monetary Fund (IMF)

Date Written: December 2007

Abstract

This paper tests whether reserve portfolios respond to exchange rate changes with a portfolio re-balancing strategy, which requires the purchase of depreciating currencies and sale of appreciating ones. The paper finds empirical support for the strategy, in particular that dollar depreciation/appreciation results in re-balancing switches vis-a-vis the other major reserve currency, the euro; valuation changes in the minor currencies tend to result in switches among themselves. The finding implies that currency diversifications in response to exchange rate changes have thus far tended to be stabilizing for exchange markets; it also helps explain the relative stability of reserve currency shares.

Keywords: Working Paper

Suggested Citation

Lim, Ewe-Ghee, Do Reserve Portfolios Respond to Exchange Rate Changes Using a Portfolio Re-balancing Strategy? An Econometric Study Using Cofer Data (December 2007). IMF Working Paper No. 07/293, Available at SSRN: https://ssrn.com/abstract=1079221

Ewe-Ghee Lim (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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