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Strategic Asset Allocation: Balancing Short-Term Liquidity Needs and Real Capital Preservation for Central Banks

In: Central Bank Reserves and Sovereign Wealth Management

Author

Listed:
  • Javier Bonza
  • Norma Gómez
  • Reinaldo Pabón

Abstract

The typical central bank strategic asset allocation is mainly focused on attending short-term liquidity needs, but has secondary consideration for real capital preservation criteria. It is well surveyed that though “conservative and very liquid” allocation of foreign reserves to US short-term treasuries, for instance, provides timely and relatively stable access to funds, it is costly in terms of falling behind the adjusted inflation or GDP growth value of foreign reserves. In fact, the probability of the typical Central Bank portfolio (consisting of US 0–3 year treasuries) of suffering negative real returns in a long-term horizon amply exceeds the chances for a typical pension portfolio allocation (60% stocks/40% fixed income). Summers (2007) finds that for a 10 year holding period the probability of having negative real returns investing in US short-term treasuries is 38%, whereas for the pension portfolio it lowers to 12.5%. Not only the probability but the size of the average loss in real terms increases, from −2.3% to −7.7%.

Suggested Citation

  • Javier Bonza & Norma Gómez & Reinaldo Pabón, 2010. "Strategic Asset Allocation: Balancing Short-Term Liquidity Needs and Real Capital Preservation for Central Banks," Palgrave Macmillan Books, in: Arjan B. Berkelaar & Joachim Coche & Ken Nyholm (ed.), Central Bank Reserves and Sovereign Wealth Management, chapter 3, pages 73-102, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-25081-9_3
    DOI: 10.1057/9780230250819_3
    as

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