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Optimal currency composition for China’s foreign reserves: A copula approach

Optimal currency composition for China’s foreign reserves: A copula approach
Optimal currency composition for China’s foreign reserves: A copula approach
This paper investigates the optimal currency composition for a country's foreign reserves. In the context of China, we examine the asymmetric, fat-tail and complex dependence structure in distributions of currency returns. A skewed, fat-tailed and pair-copula construction is then built to capture features of higher moments. In a D-vine copula approach, we show that under the disappointment aversion effect, the central bank in our model can achieve sizeable gains in expected economic value from switching from the mean-variance to copula modelling. We find that this approach will lead to an optimal currency composition that allows China to have more space for international currency diversification while maintaining the leading position of the US dollar in the currency shares of China's reserves.
0378-5920
1947-1965
Zhang, Zhichao
66d78c95-5738-46db-9318-0305147d9351
Ding, Li
f597f63f-9c78-49e4-9661-20fad153f74e
Zhang, Fan
f8938829-9ba0-430e-bbfc-344a4d7a699d
Zhang, Zhuang
df7b9fa8-04fd-4085-b74d-c9c1506b974e
Zhang, Zhichao
66d78c95-5738-46db-9318-0305147d9351
Ding, Li
f597f63f-9c78-49e4-9661-20fad153f74e
Zhang, Fan
f8938829-9ba0-430e-bbfc-344a4d7a699d
Zhang, Zhuang
df7b9fa8-04fd-4085-b74d-c9c1506b974e

Zhang, Zhichao, Ding, Li, Zhang, Fan and Zhang, Zhuang (2014) Optimal currency composition for China’s foreign reserves: A copula approach. The World Economy, 38 (12), 1947-1965.

Record type: Article

Abstract

This paper investigates the optimal currency composition for a country's foreign reserves. In the context of China, we examine the asymmetric, fat-tail and complex dependence structure in distributions of currency returns. A skewed, fat-tailed and pair-copula construction is then built to capture features of higher moments. In a D-vine copula approach, we show that under the disappointment aversion effect, the central bank in our model can achieve sizeable gains in expected economic value from switching from the mean-variance to copula modelling. We find that this approach will lead to an optimal currency composition that allows China to have more space for international currency diversification while maintaining the leading position of the US dollar in the currency shares of China's reserves.

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More information

Published date: 13 November 2014

Identifiers

Local EPrints ID: 451990
URI: http://eprints.soton.ac.uk/id/eprint/451990
ISSN: 0378-5920
PURE UUID: 8317a31b-9261-4648-9284-45797aeed30f
ORCID for Zhuang Zhang: ORCID iD orcid.org/0000-0001-5369-3144

Catalogue record

Date deposited: 08 Nov 2021 17:30
Last modified: 09 Jan 2022 03:56

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Contributors

Author: Zhichao Zhang
Author: Li Ding
Author: Fan Zhang
Author: Zhuang Zhang ORCID iD

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