Strategic Asset Allocation: Balancing Short-Term Liquidity Needs and Real Capital Preservation for Central Banks

Javier Bonza, Norma Gómez and Reinaldo Pabón

Chapter 3 in Central Bank Reserves and Sovereign Wealth Management, 2010, pp 73-102 from Palgrave Macmillan

Abstract: Abstract The typical central bank strategic asset allocation is mainly focused on attending short-term liquidity needs, but has secondary consideration for real capital preservation criteria. It is well surveyed that though “conservative and very liquid” allocation of foreign reserves to US short-term treasuries, for instance, provides timely and relatively stable access to funds, it is costly in terms of falling behind the adjusted inflation or GDP growth value of foreign reserves. In fact, the probability of the typical Central Bank portfolio (consisting of US 0–3 year treasuries) of suffering negative real returns in a long-term horizon amply exceeds the chances for a typical pension portfolio allocation (60% stocks/40% fixed income). Summers (2007) finds that for a 10 year holding period the probability of having negative real returns investing in US short-term treasuries is 38%, whereas for the pension portfolio it lowers to 12.5%. Not only the probability but the size of the average loss in real terms increases, from −2.3% to −7.7%.

Keywords: Latin American Country; Sharpe Ratio; Contingent Claim; Mean Absolute Deviation; International Reserve (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-0-230-25081-9_3

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DOI: 10.1057/9780230250819_3

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