The Case For Macro Risk Budgeting And Portfolio Tranching In Reserves Management
AbstractThe set of objectives in reserves management are normally predefined and include: protecting the economy against potential external shocks on the current account or on capital flows; invest the reserves minimizing the potential of a loss and ensuring the availability of international liquidity when necessary. Whereas the adoption of a floating exchange rate in theory reduces the need for reserves to protect against external shocks, in the context of free capital movements it will be a function of the efficiency of international markets. In practical terms, Reserves Management is a process with a high effective complexity. The manager is confronted with the randomness of markets – including its own through the impact on the Reserves of Central Bank intervention – and the regularities that arise from its guidelines (i.e. credit and market risk, as well as liquidity policies) and the foreign exchange intervention mechanisms. Recently, given the increase in the size of the foreign reserves in recent decades for some central banks, as a result and in response to globalization and more volatility on currency flows, portfolio foreign investment and other related factors as contagion effects, the pressure to generate long-term returns has increased. However, the goal of increased returns is subdued to the security and liquidity objectives in international reserves management. As a result, the process of asset allocation and the construction of an efficient set of investment guidelines, as well as a risk policy, must be framed by a liquidity policy and, generally, to an asymmetric exposure to risk where capital loses are to be avoided in specific time horizons; i.e. a fiscal year.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by BANCO DE LA REPÚBLICA in its series BORRADORES DE ECONOMIA with number 003567.
Date of creation: 30 May 2004
Date of revision:
Contact details of provider:
Other versions of this item:
- Alejandro Reveiz, . "The Case for Macro Risk Budgeting and Portfolio Tranching in Reserves Management," Borradores de Economia 290, Banco de la Republica de Colombia.
You can help add them by filling out this form.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Norma Judith Paternina).
If references are entirely missing, you can add them using this form.