Journal of Asset Management

, Volume 17, Issue 4, pp 295–312 | Cite as

Towards greater diversification in central bank reserves

  • Marie BrièreEmail author
  • Valérie Mignon
  • Kim Oosterlinck
  • Ariane Szafarz
Original Article


This article compares the performance of various diversification strategies regarding foreign exchange reserves. The aim is to provide central banks with guidelines in portfolio allocation. We pay particular attention to the situation of upward pressures on US interest rates by implementing our analysis over both the whole 1986–2015 period and a rising rate subsample. Relying on geometric tests of mean-variance efficiency, we show that introducing currencies weakly correlated to the USD (AUD and CAD) significantly reduces portfolio risk. Expected return is improved through mortgage-backed securities, corporate bonds and equities.


foreign exchange reserves diversification asset allocation 


  1. Banco Centrale de Chile (2012) Management of Foreign Exchange Reserves at the Central Bank of Chile,, accessed 3 March 2014.
  2. Basak, G., Jagannathan, R. and Sun, G. (2002) A direct test for the mean-variance efficiency of a portfolio. Journal of Economic Dynamics and Control 26 (7–8): 1195–1215.CrossRefGoogle Scholar
  3. Beck, R. and Rahbari, E. (2011) Optimal reserve composition in the presence of sudden stops. Journal of International Money and Finance 30 (6): 1107–1127.CrossRefGoogle Scholar
  4. Beck, R. and Weber, S. (2011) Should larger reserve holdings be more diversified? International Finance 14 (3): 415–444.CrossRefGoogle Scholar
  5. Ben-Bassat, A. (1980) The optimal composition of foreign exchange reserves. Journal of International Economics 10 (2): 285–295.CrossRefGoogle Scholar
  6. Bernadell, C., Cardon, P., Coche, J., Diebold, F.X. and Manganelli, S. (2004) Risk Management for Central Bank Foreign Reserves, Frankfurt: European Central Bank.Google Scholar
  7. Borio, C., Ebbesen, J., Galati, G. and Health, A. (2008a) FX Reserve Management: Elements of a Framework. Basel: Bank for International Settlements. BIS Papers no. 38.Google Scholar
  8. Borio, C., Galati, G. and Health, A. (2008b) FX Reserve Management: Trends and Challenges. Basel: Bank for International Settlements. BIS Papers no. 40.Google Scholar
  9. Brière, M., Chapelle, A. and Szafarz, A. (2012) No contagion, only globalization and flight to quality. Journal of International Money and Finance 31 (6): 1729–1744.CrossRefGoogle Scholar
  10. Brière, M., Drut, B., Mignon, V., Oosterlinck, K. and Szafarz, A. (2013) Is the market portfolio efficient? A new test of mean variance efficiency when all assets are risky. Finance 34 (1): 7–41.Google Scholar
  11. Chinn, M. (2014) Emerging market economies and the next reserve currencies. Open Economies Review 26 (1): 155–174.CrossRefGoogle Scholar
  12. Cova, P., Pagano, P. and Pisani, M. (2015) Foreign exchange reserve diversification and the ‘exorbitant privilege’: Global macroeconomic effects. Journal of International Money and Finance, available online 25 June 2015,
  13. Eichengreen, B. (2011) Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System, Oxford: Oxford University Press.Google Scholar
  14. Eichengreen, B. and Flandreau, M. (2014) A Century and a Half of Central Banks, International Reserves and International Currencies. Norges Bank Conference “Of the uses of Central Banks: Lessons from history”, June 5–6, 2014, Oslo, Norway.Google Scholar
  15. Gerard, B., Hillion, P., de Roon, F.A. and Eiling, E. (2012) International portfolio diversification: Currency, industry and country effects revisited. Journal of International Money and Finance 31 (5): 1249–1278.CrossRefGoogle Scholar
  16. Goldberg, L.S., Hull, C. and Stein, S.K. (2013) Do industrialized countries hold the right foreign exchange reserves? Current Issues in Economics and Finance 19 (1): 1–10.Google Scholar
  17. Jondeau, E. and Rockinger, M. (2006) Optimal portfolio allocation under higher moments. European Financial Management 12 (1): 29–55.CrossRefGoogle Scholar
  18. Jones, C. (2014) Central banks set to cut debt holdings. Financial Times 23 June.Google Scholar
  19. Jorion, P. (2007) Value at Risk: The New Benchmark for Managing Financial Risk. 3rd edn. New York: McGraw-Hill.Google Scholar
  20. Kandel, S. and Stambaugh, R.F. (1995) Portfolio inefficiency and the cross-section of expected returns. Journal of Finance 50 (1): 157–184.CrossRefGoogle Scholar
  21. Levy, H. and Markowitz, H.M. (1979) Approximating expected utility by a function of mean and variance. American Economic Review 69 (3): 308–317.Google Scholar
  22. Li, K., Asani, S. and Wang, Z. (2003) Diversification benefits of emerging markets subject to portfolio constraints. Journal of Empirical Finance 10 (1–2): 57–80.CrossRefGoogle Scholar
  23. McCauley, R.N. and Fung, B.S. (2003) Choosing instruments in managing dollar foreign exchange reserves. BIS Quarterly Review (March): 39–69.Google Scholar
  24. McCauley, R.N. and Rigaudy, J.-F. (2011) Managing Foreign Exchange Reserves in the Crisis and After. Basel: Bank for International Settlements. BIS Papers no. 58.Google Scholar
  25. Medeiros, C. and Nocera, S. (1988) The Potential Role of the SDR in Diversified Currency Portfolios of Central Banks. Washington: International Monetary Fund. IMF Working Paper 88/81.Google Scholar
  26. Morahan, A. and Mulder, C. (2013) Survey of Reserve Managers: Lessons from the Crisis. Washington: International Monetary Fund. IMF Working Paper 13/99.Google Scholar
  27. Pan, L. and Junbo, Z. (2008) The Management of China’s Huge Foreign Reserve and its Currency Composition. Berlin: Institute of Management Berlin at the Berlin School of Economics (FHW Berlin), Working Paper no.37.Google Scholar
  28. Plender, J. (2014) Follow the Swiss for reserve management Success. Financial Times 9 December.Google Scholar
  29. Ramaswamy, S. (2008) Managing international reserves: How does diversification affect financial costs. BIS Quarterly Review (June): 45–55.Google Scholar
  30. Wang, Z. (1998) Efficiency loss and constraints on portfolio holdings. Journal of Financial Economics 48 (3): 359–375.CrossRefGoogle Scholar
  31. Wei, L. and Cui, C. (2013) China is seeking US assets. Wall Street Journal 20 May.Google Scholar
  32. Wooldridge, P.D. (2006) The changing composition of official reserves. BIS Quarterly Review (September): 25–38.Google Scholar

Copyright information

© Palgrave Macmillan, a division of Macmillan Publishers Ltd 2016

Authors and Affiliations

  • Marie Brière
    • 1
    Email author
  • Valérie Mignon
  • Kim Oosterlinck
  • Ariane Szafarz
  1. 1.Amundi, 91 Boulevard PasteurParisFrance

Personalised recommendations