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Ranking, risk-taking and effort: an analysis of the ECB's foreign reserves management

Antonio Scalia () and Benjamin Sahel ()
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Benjamin Sahel: European Central Bank

No 840, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: The investment of the ECB reserves in US dollars and yen involves an annual performance assessment of portfolio managers, located in the Eurosystem�s national central banks. Employing new data on individual portfolios during 2002-2009, we study this peculiar tournament and show the existence of risk-shifting behaviour by reserve managers related to their year-to-date ranking: interim losers increase relative risk in the second half of the year, in the same way as mutual fund managers. In the dollar case the adjustment to ranking is reduced or offset if reserve managers have achieved a positive interim performance against the benchmark. Yen reserve managers that rank low show a tendency to increase effort, as proxied by portfolio turnover. Those who ranked low in the previous year tend to reduce risk significantly. Since reserve managers should have a comparative advantage over the benchmark within a monthly horizon, possible enhancements to the design of the tournament might involve an increased reward for effort and performance by means of a convex scoring system linked to monthly, rather than annual, performance.

Keywords: foreign exchange reserves; tournament; incentives; effort; portfolio management (search for similar items in EconPapers)
JEL-codes: G11 E58 D81 (search for similar items in EconPapers)
Date: 2012-01
New Economics Papers: this item is included in nep-mon
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Working Paper: Ranking, risk-taking and effort: an analysis of the ECB's foreign reserves management (2011) Downloads
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