The Portfolio Optimization Of China's Foreign Exchange Reserve Based On MMVD Model

In recent years, China's foreign exchange reserve has maintained rapid growth. By the end of June 2007, the official holdings of foreign exchange reserves of the total 1.33 trillion dollars, had an increase of 41.6%, still the first in the world to scale. This caused not only the risks of "currency mismatch" to Central Bank's assets and liabilities, but also the enormous social costs. Under the long-term context of the continuing appreciation of the RMB, and depreciation of dollar against other major international reserve currency, the value of China's high foreign exchange reserves had to face the shrinking risk. So, optimizing the structure of China's foreign reserves, seems to be very urgent and necessary, in order to release the cost pressures and structural risk from the rapid growth.In this thesis, we use the MMVD model to discuss the portfolio optimization problem of China's foreign exchange reserves in US dollar. Firstly, we had described the profile of China's foreign exchange reserve structure, pointed out the disadvantage that existed. Than, we started specific analysis of the two basic ideas on the optimization of China's foreign exchange reserves, in order to find a realistic choice. At last, we applied the MMVD model on the portfolio optimization problem of China's foreign exchange reserves. The date published by the FRB and Treasury was used in the empirical simulation. To test the investment performance and verify the validity of MMVD model, a comparison with M-V model was taken based on the same sample data.Particularly, we argued for MMVD model to solve the portfolio optimizing problem of China's foreign exchange reserve in US dollar, just providing a simple and feasible tool for the analysis. But actually, optimizing the structure of foreign exchange reserve is much more complex than that we had described in the thesis. In particular, reserves managers can flexibly adjust the minimum income level. The model can also add constraints to the assets of the investment ratio, in order to meet the specific requirements and operating objectives.