Summary
To gain an empirical impression of the SDR's attractiveness as a reserve asset, an amended mean-variance analysis is applied to official reserves. The main amendments bear upon the choice of the numeraire and the rejection of both the capital market line and the effective yield's positive marginal utility-frequently assumed in empirical analysis. Comparison of the outcome with that recently obtained by Ben-Bassat shows a large sensitivity of optimal portfolio results for slight differences in assumptions. A second, substantial kind of sensitivity of an asset's position in a portfolio appears to ensue from the influence of other competing functions of reserves.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Baron, D.P.,1977, ‘On the Utility Theoretic Foundations of Mean-Variance Analysis,’Journal of Finance, 32, pp. 1683–1697.
Ben-Bassat, A., 1980, ‘The Optimal Composition of Foreign Exchange Reserves,’Journal of International Economics, 10, pp. 285–295.
Ben-Bassat, A., 1984, ‘Reserve-Currency Diversification and the Substitution Account,’Princeton Studies in International Finance, 53, International Finance Section, Princeton University.
Cooper, R.N., 1970, ‘International Liquidity and Balance of Payments Adjustment,’ in: International Monetary Fund,International Reserves; Needs and Availability, Washington, D.C.,pp. 125–145.
Farber, A., R. Roll and B. Solnik, 1977, ‘An Empirical Study of Risk under Fixed and Flexible Exchange Rates,’Carnegie-Rochester Conference Series on Public Policy, 5, pp. 235–266.
Furstenberg, G.M. von, 1981, ‘Simulated Reserve Currency Performance Indicates Investment Qualities of the SDR,’IMF Survey, 10, pp. 26–28.
Gold, J., 1978, ‘Some First Effects of the Second Amendment,’Finance and Development, 15, pp. 24–30.
Hamada, K. and K. Ueda, 1977, ‘Random Walks and the Theory of the Optimal International Reserves,’Economic Journal, 87, pp. 722–742.
Hanosch, G. and H. Levy, 1970, ‘Efficient Portfolio Selection with Quadratic and Cubit Utility,’Journal of Business, 43, pp. 181–189.
Heller, H.R., 1966, ‘Optimal International Reserves,’Economic Journal, 76, pp 294–311.
International Monetary Fund, 1978,Annual Report 1978, Washington, D.C.
Jager, H. and E. de Jong, 1984, ‘Optimal Reserve Asset Composition, Special Drawing Rights, and the Size of a Substitution Account,’Société Universitaire Européene de Recherches Financiéres Series, 47, Tilburg.
Laney, L.O., 1980, ‘Towards a Multiple Reserve System,’Euromoney, September, pp. 127–139.
Makin, J.H., 1974, ‘Composition and Variability of the SDR,’Review of Economics and Statistics, 66, pp. 308–314.
Shirreff, D., 1984, ‘The Dollar Deluge,’Euromoney, November, pp. 60–69.
Tobin, J., 1969, ‘Comment on Borch and Feldstein,’Review of Economic Studies, 36, pp. 13–14.
Westerfield, J.M., 1977, ‘An Examination of Foreign Exchange Risk under Fixed and Floating Rate Regimes,’Journal of International Economics, 7, pp. 181–200.
Additional information
The authors are Professor and Assistant Professor of International Economics, University of Amsterdam, The Netherlands. The research of the second author was financially supported by the Netherlands organization for the advancement of pure research (Z.W.O.), no. 46-108. This research is part of the project ‘Exchange-rate and monetary policy in international dependence.’ The paper was presented earlier at the conference ’Research in international finance,‘ Jouyen-Josas, France (June 19 and 20, 1986). Computational assistance by Jeannette Capel, Reiner Gratama, and Martin O. Nijkamp and comments by an anonymous referee are gratefully acknowledged.
Rights and permissions
About this article
Cite this article
Jager, H., de Jong, E. The perspective of the SDR's position in monetary reserves on the robustness of optimal portfolio results. De Economist 134, 417–437 (1986). https://doi.org/10.1007/BF01423604
Issue Date:
DOI: https://doi.org/10.1007/BF01423604