Strategic Asset Allocation for Central Bank’s Management of Foreign Reserves: A new approach

Zhang, Zhichao and Chau, Frankie and Xie, Li (2012): Strategic Asset Allocation for Central Bank’s Management of Foreign Reserves: A new approach.

Abstract

This paper proposes a new approach to strategic asset allocation for central banks’ management of foreign reserves. This eclectic approach combines the behavioural portfolio management in the framework of mean-variance mental accounting (MVMA) with the improvements on asset return forecast offered by the Black-Litterman (B-L) model, proving particularly suitable for the reserve management policy with multiple objectives. The B-L model is embedded into the MVMA framework to obtain both the equilibrium and the B-L returns as our improved forecasts, formulating forward-looking investment strategies. The approach is applied to the case of China to derive optimal asset allocation for the Chinese central bank.

• Item Type: MPRA Paper
• Language: English
• Keywords: Reserve Management, Strategic Asset Allocation, Mental Accounting, Black-Litterman model, China’s Foreign Reserves
• Subjects: G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C61 - Optimization Techniques ; Programming Models ; Dynamic Analysis; G - Financial Economics > G0 - General; C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C11 - Bayesian Analysis: General

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