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Do Reserve Portfolios Respond to Exchange Rate Changes Using a Portfolio Rebalancing Strategy? An Econometric Study Using COFER Data

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Author Info

  • Ewe-Ghee Lim

Abstract

This paper tests whether reserve portfolios respond to exchange rate changes with a portfolio rebalancing 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 rebalancing 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.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/293.

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Length: 22
Date of creation: 01 Dec 2007
Date of revision:
Handle: RePEc:imf:imfwpa:07/293

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Related research

Keywords: Exchange rates; exchange rate; equations; exchange markets; probability; empirical model; equation; probability value; exchange rate changes; standard error; dollar exchange rate; foreign exchange; foreign exchange reserves; exchange reserves; current dummy variable; correlation; statistics; financial statistics; constant term; exchange market intervention; currency euro exchange rate; exchange rate appreciation; currency exchange; exchange rate change; autocorrelation; currency transactions; foreign exchange market;

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References

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  1. Papaioannou, Elias & Portes, Richard & Siourounis, Gregorios, 2006. "Optimal currency shares in international reserves: The impact of the euro and the prospects for the dollar," Journal of the Japanese and International Economies, Elsevier, vol. 20(4), pages 508-547, December.
  2. Barry J. Eichengreen & Donald J. Mathieson, 2000. "The Currency Composition of Foreign Exchange Reserves," IMF Working Papers 00/131, International Monetary Fund.
  3. Ewe-Ghee Lim, 2006. "The Euro's Challenge to the Dollar," IMF Working Papers 06/153, International Monetary Fund.
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Cited by:
  1. Beck, Roland & Rahbari, Ebrahim, 2011. "Optimal reserve composition in the presence of sudden stops," Journal of International Money and Finance, Elsevier, vol. 30(6), pages 1107-1127, October.
  2. Beck, Roland & Rahbari, Ebrahim, 2008. "Optimal reserve composition in the presence of sudden stops: the euro and the dollar as safe haven currencies," Working Paper Series 0916, European Central Bank.

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