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Liquidity, Risk, and Return: Specifying an Objective Function for the Management of Foreign Reserves

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  • Yuliya Romanyuk

Abstract

An objective function is a key component of a strategic portfolio management model used to determine the optimal allocations of assets and, possibly, their associated liabilities over some investment horizon. The author discusses investment philosophies and perspectives for the management of foreign reserves, and investigates how to translate the three common policy objectives for reserves (liquidity, safety, and return) into objective functions for strategic reserves management. Stochastic programming is identified as an advantageous modelling framework to capture the objectives of foreign reserves management, and a strategic reserves management model is illustrated that trades off expected net returns with costs and liquidity issues related to a potential liquidation of a portion of the portfolio.

Suggested Citation

  • Yuliya Romanyuk, 2010. "Liquidity, Risk, and Return: Specifying an Objective Function for the Management of Foreign Reserves," Discussion Papers 10-13, Bank of Canada.
    • Handle: RePEc:bca:bocadp:10-13
    DOI: 10.34989/sdp-2010-13
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    References listed on IDEAS

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    1. Ben-Bassat, Avraham & Gottlieb, Daniel, 1992. "Optimal international reserves and sovereign risk," Journal of International Economics, Elsevier, vol. 33(3-4), pages 345-362, November.
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    3. M. Bahmani-Oskooee & F. Brown, 2002. "Demand for international reserves: a review article," Applied Economics, Taylor & Francis Journals, vol. 34(10), pages 1209-1226.
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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