Estimating the Currency Composition of Foreign Exchange Reserves

2022/06/28 by Matthew Ferranti, Ferranti, Matthew · 1 citation
Economics, Econometrics and Finance · #Econometrics (econ.EM) #FOS: Economics and business #Global Financial Crisis and Policies #Monetary Policy and Economic Impact #Statistical Finance (q-fin.ST)

paper · pdf · doi:10.48550/arxiv.2206.13751

openalex publication_date 2022/06/28 · openalex created_date 2022/07/01 · openalex updated_date 2026/07/28

Abstract

Central banks manage about $12 trillion in foreign exchange reserves, influencing global exchange rates and asset prices. However, some of the largest holders of reserves report minimal information about their currency composition, hindering empirical analysis. I describe a Hidden Markov Model to estimate the composition of a central bank's reserves by relating the fluctuation in the portfolio's valuation to the exchange rates of major reserve currencies. I apply the model to China and Singapore, two countries that collectively hold about $3.4 trillion in reserves and conceal their composition. I find that both China's reserve composition likely resembles the global average, while Singapore probably holds fewer US dollars.

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• MARKETS, BIRTH-RATES, WATCHDOGS: THE EVOLVING FISCAL CONSTRAINT IN ADVANCED ECONOMIES

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