Asset Class Diversification and Delegation of Responsibilities between Central Banks and Sovereign Wealth Funds

Joshua Aizenman and Reuven Glick

Santa Cruz Department of Economics, Working Paper Series from Department of Economics, UC Santa Cruz

Abstract: This paper presents a model comparing the optimal degree of asset class diversification abroadby a central bank and a sovereign wealth fund. We show that if the central bank manages itsforeign asset holdings in order to meet balance of payments needs, particularly in reducing theprobability of sudden stops in foreign capital inflows, it will place a high weight on holding saferforeign assets. In contrast, if the sovereign wealth fund, acting on behalf of the Treasury,maximizes the expected utility of a representative domestic agent, it will opt for relativelygreater holding of more risky foreign assets. We also show how the diversification differencesbetween the strategies of the bank and SWF is affected by the government’s delegation ofresponsibilities and by various parameters of the economy, such as the volatility of equity returnsand the total amount of public foreign assets available for management.

Keywords: Social and Behavioral Sciences; Sovereign wealth funds; capital flows; foreign exchange reserves; financial markets; governance (search for similar items in EconPapers)
Date: 2010-09-15
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Citations: View citations in EconPapers (5)

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Related works:
Working Paper: Asset class diversification and delegation of responsibilities between central banks and sovereign wealth funds (2010)
Working Paper: Asset Class Diversification and Delegation of Responsibilities between Central Banks and Sovereign Wealth Funds (2010)
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