Ranking, risk-taking and effort: an analysis of the ECB's foreign reserves management
AbstractThe investment of the ECB reserves in US dollars and yen involves an annual performance assessment of portfolio managers, located in the Eurosystem’s national central banks. Employing new data on individual portfolios during 2002-2009, we study this peculiar tournament and show the existence of risk-shifting behaviour by 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. In the dollar case the adjustment to ranking is reduced or offset if reserve managers have achieved a positive interim performance against the benchmark. Yen reserve managers that rank low show a tendency to increase effort, as proxied by portfolio turnover. Those who ranked low in the previous year tend to reduce risk significantly. Since reserve managers should have a comparative advantage over the benchmark within a monthly horizon, possible enhancements to the design of the tournament might involve an increased reward for effort and performance by means of a convex scoring system linked to monthly, rather than annual, performance.
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Bibliographic InfoPaper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 840.
Date of creation: Jan 2012
Date of revision:
foreign exchange reserves; tournament; incentives; effort; portfolio management;
Other versions of this item:
- Scalia, Antonio & Sahel, Benjamin, 2011. "Ranking, risk-taking and effort: an analysis of the ECB's foreign reserves management," Working Paper Series 1377, European Central Bank.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
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