Estimating the Currency Composition of Foreign Exchange Reserves
Statistical Finance
2023-05-09 v4 Econometrics
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.
Keywords
Cite
@article{arxiv.2206.13751,
title = {Estimating the Currency Composition of Foreign Exchange Reserves},
author = {Matthew Ferranti},
journal= {arXiv preprint arXiv:2206.13751},
year = {2023}
}