Optimal Currency Composition Of Chinese Foreign Exchange Reserve

With Chinese FER (Foreign Exchange Reserve) soring to 1300 billions US Dollars till Jun. 2007, qualitative management of FER has grown to be considerable urgent issue to be resolved for the time being. Besides resort to various investing instruments and channels, which means transferring foreign exchange from reserve account to direct or indirect international investment account under balance sheet of central bank, then foreign exchange reserve management itsself requires more scientific and precise operating skills. So COFER (Currency Composition Of Foreign Exchange Reserve) management should be placed enough emphasis due to its borned dominance in structure-layer research, and fundermentally seeking the balance point for profitability, security, and liquidity of foreign exchange reserve.Here we will dedicate to work out a optimal COFER for China, which focus on a maximized endogenous return under real effective exchange rate flctuating within interval and set risk constraints.For endogenous return, we take mutual influence of FER(dominated in specific currency) to be partially closed out and residual position(dominated in the same currency) into account, since closing out operation itself is for more return and at the same time we have to undertake the depreciation of residual positions.This effect does make sense for those high position of FER holding countries.For calcuation process, advanced economitric methods, such as VAR and GARCH, are employed to figure out key parameters to measure the endogeneousity and historical return flutuations-Variance-Covariance matrix.Finally, we can get different opitmal COFER choices with risk portfolio varies.