Estimating the Currency Composition of Foreign Exchange Reserves

Matthew Ferranti

Papers from arXiv.org

Abstract: Central banks manage about \$12 trillion in foreign exchange reserves, influencing global exchange rates and asset prices. However, some of the largest holders of reserves report minimal information about their currency composition, hindering empirical analysis. I describe a Hidden Markov Model to estimate the composition of a central bank's reserves by relating the fluctuation in the portfolio's valuation to the exchange rates of major reserve currencies. I apply the model to China and Singapore, two countries that collectively hold about \$3.4 trillion in reserves and conceal their composition. I find that both China's reserve composition likely resembles the global average, while Singapore probably holds fewer US dollars.

Date: 2022-06, Revised 2023-05
New Economics Papers: this item is included in nep-ban, nep-cba, nep-ifn, nep-mon and nep-sea
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