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Foreign exchange reserves management in the presence of jump risk

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  • Dewei Zhang
  • Chunyang Zhou

Abstract

This article investigates how the jump in the exchange rate and risky asset can affect the central bank's foreign management. We find that the jump in the exchange rate has a positive impact on the need for the risky asset, whereas the jump in the risky asset has a negative impact. However, the overall impact relies on how effective the central bank can intervene in the exchange market. Specifically, if the central bank can intervene in the market effectively, the safety of foreign reserves becomes a more important issue, which will decrease the need for risky asset.

Suggested Citation

  • Dewei Zhang & Chunyang Zhou, 2013. "Foreign exchange reserves management in the presence of jump risk," Applied Economics Letters, Taylor & Francis Journals, vol. 20(3), pages 250-254, February.
    • Handle: RePEc:taf:apeclt:v:20:y:2013:i:3:p:250-254
    DOI: 10.1080/13504851.2012.689106
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    References listed on IDEAS

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    1. Merton, Robert C., 1976. "Option pricing when underlying stock returns are discontinuous," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 125-144.
    2. Michael Johannes, 2004. "The Statistical and Economic Role of Jumps in Continuous-Time Interest Rate Models," Journal of Finance, American Finance Association, vol. 59(1), pages 227-260, February.
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