 Risk preferences, global market conditions and foreign debt: Is there any role for the currency composition of FX reserves?Research in Economics, 2023, vol. 77, issue 3, 402-418 Abstract: I estimate a transition probability matrix associated with a two-state Markov process of emerging market economies (EMEs) volatility. The different states of EMEs volatility, generate switches in central bank preferences between approximated constant relative risk aversion and increasing relative risk aversion expected utility. Therefore, I construct and propose constrained portfolio selection frameworks with skewness, for the currency composition of FX reserves over different EMEs volatility states for Brazil, Indonesia and South Africa. These EMEs have constituted as part of the “Fragile Five”. Thus, I propose progressive risk management procedures for these EMEs. These portfolio selection frameworks satisfy Pratt–Arrow measures of risk aversion and are constrained by each country’s currency composition of foreign debt. Using different methods of computing expected FX reserves returns, traditional strategic FX reserve assets and different maturity structures, I simulate optimal FX reserve weights for each EME and validate my proposal. Keywords: Expected utility; Portfolio selection with skewness; EMEs currency composition of FX reserves; Foreign debt (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:reecon:v:77:y:2023:i:3:p:402-418 DOI: 10.1016/j.rie.2023.06.007 Access Statistics for this article Research in Economics is currently edited by Federico Etro More articles in Research in Economics from Elsevier |
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