The Research On Estimation, Optimization And Adjustment Of Currency Composition Of China's Foreign Exchange Reserves

China's official foreign exchange reserve reached 2.4 trillion U.S. dollars at the end of September 2009. High foreign exchange reserves has not only brought huge funds outstanding for foreign exchange and the resulting write-off costs, but also faces risk of exchange rate, interest rate, liquidity and political. At present, our theoretical circles mostly concentrated on the moderate scale of foreign exchange reserves. Risk management of foreign exchange reserves, especially the optimization of currency structure, is mainly based on empirical judgments, which lacks some necessary quantitative analysis tools and requires further study either in breadth or in depth. Therefore combining with China's foreign exchange reserves risk management practice, using the theories and methods of Markowitz portfolio, fuzzy decision theory, econometric theories and so on, we studied the structural problems of China's foreign exchange reserve systematically, providing strong support for investment decision-making on the foreign exchange reserves.We have a comprehensive and systematical study on foreign exchange reserves that include estimation of currency structure, optimization of FX currency and adjustment strategy.It mainly consists of four parts:preliminary analysis of the composition of foreign reserves, the estimation of the composition of foreign reserves, the optimal currency structure theory and empirical research, and structural adjustment strategy. We have either normative research or empirical studies; We not only answered the currency structure of China's foreign exchange reserves "what" question, but also answered the currency structure of China's foreign exchange reserves "should be what" question.In the first part, we analyze the institutional framework and status of the currency composition management of China's foreign exchange reserve, summarize the main factors which impact the currency composition of foreign exchange reserves and introduce three traditional model of currency management of FX reserve which are portfolio-Model, Heller-Knight-Model and Dooly-Model.In the second part, we firstly analyze the relationship of currency allocation, the risk and investment returns of foreign currency reserve assets. Assuming the transform of foreign exchange reserve's scale will affect the risk choice of foreign exchange reserve investment, this paper developed a cubic utility function to analyze the risk-return tradeoff between safety, liquidity and profitability in the aspect of foreign exchange reserve investment. The paper establishes a theoretical model of currency composition of foreign reserves based on Maximum Utility. By applying real data, we established general linear econometric model and multi-variants lagged co-integration model for the currency composition of foreign reserves and risk-return. The methods of Co-integration Analysis, Granger Causality Test are implemented.Then, basing on the model of Sheng L.G., Zhao H.Y. (2007), we expand it and use quarterly data from 2000 to 2009 estimating the currency composition of China's foreign reserves and the rate of return respectively under four different assumptions about the number of reserve currencies of foreign exchange reserves.In the third section, the Fuzzy Decision Theory was introduced into the currency structure management of foreign exchange reserves. Through the analysis of all relevant economic factors which impact foreign exchange reserves and the use of Fuzzy Programming Method, a variety of macroeconomic factors and profitability-risk factors are taken into account in the model's constraints and objectives which constitute a multi-constrained multi-objective optimization model.The model not only consider the profitability and risk of foreign exchange reserves, but also take into account its executive function, overcoming the disadvantages of regression analysis and pure portfolio method.Secondly, in view of the practice of China's foreign exchange reserves management recently, China's foreign exchange reserve management has been convergence with the international fund management industry, according to specialization and internationalization of the international fund management mode of operation, using common international investment benchmark as the core business in the asset management. Therefore, we establish two investment benchmark and three kinds of market risk system, build up optimal portfolio model based on the multi-investment-benchmark and multi-risk-system, and simulate the currency structure of foreign exchange reserves and their movements respectively under the assumption of the normal distribution and non-normal distribution, fixed and changed risk aversion degree.In the fourth section, we bring up how to achieve the adjustment strategies of optimal currency structure of foreign exchange reserves according to the results of second part and the third part. Foreign exchange reserve structure include currency and asset structure, the asset of foreign exchange reserve can be divided into debt assets and equity assets. Therefore, we analyze and discuss the adjustment strategies of the currency composition of foreign exchange reserves from three areas which include currency restructuring, debt restructuring and equity restructuring. In the currency restructuring, since the magnitude of China's foreign exchange reserves and the international financial market turmoil intensified, we should abandon a purely passive diversification strategy. On the contrary, active and stable diversification strategy should be both used flexibly; Duing to the short-term bond yields at historically lowest level, it provide the best opportunity for reduction of short-term bonds in creditor class assets structure adjustment. Long-term U.S. bond yields remain high, but if the decline happens, then it is the time to reduce long-term bonds; Applying Evolutionary Financial Theory to analyze structural adjustment of equity asset, it is recommended that you should invest in equity asset according to their relative proportion of the returns, and you can not put most of wealth to one asset which had high rate of return at that time, otherwise you would suffer loss of wealth.