Liquidity, Risk, and Return: Specifying an Objective Function for the Management of Foreign Reserves

Yuliya Romanyuk

Discussion Papers from Bank of Canada

Abstract: An objective function is a key component of a strategic portfolio management model used to determine the optimal allocations of assets and, possibly, their associated liabilities over some investment horizon. The author discusses investment philosophies and perspectives for the management of foreign reserves, and investigates how to translate the three common policy objectives for reserves (liquidity, safety, and return) into objective functions for strategic reserves management. Stochastic programming is identified as an advantageous modelling framework to capture the objectives of foreign reserves management, and a strategic reserves management model is illustrated that trades off expected net returns with costs and liquidity issues related to a potential liquidation of a portion of the portfolio.

Keywords: Foreign; reserves; management (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocadp:10-13

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