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Liquidity management of foreign exchange reserves in continuous time

  • Zhang, Dewei
  • Wang, Yiqi
  • Wang, Jingjing
  • Xu, Weidong
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    In order to cope with daily foreign currency exchange payments or trades and avoid liquidity crisis, central banks need to maintain the liquidity of foreign exchange reserves. In this paper, we develop a Foreign Exchange Reserves Liquidity Management (FERLM) model based on stochastic process by introducing a foreign exchange factor. We also generate a feasible target proportion of the liquidity reserve to total foreign exchange reserves, by seeking the balance between capital gains of holding foreign exchange reserves and losses of liquidity insufficiency.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0264999312004099
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    Article provided by Elsevier in its journal Economic Modelling.

    Volume (Year): 31 (2013)
    Issue (Month): C ()
    Pages: 138-142

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    Handle: RePEc:eee:ecmode:v:31:y:2013:i:c:p:138-142
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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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. Xavier Freixas & Jean-Charles Rochet, 2008. "Microeconomics of Banking, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062704, June.
    3. Ringbom, Staffan & Shy, Oz & Stenbacka, Rune, 2004. "Optimal liquidity management and bail-out policy in the banking industry," Journal of Banking & Finance, Elsevier, vol. 28(6), pages 1319-1335, June.
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