The Study On The Asset Allocation Of Chinese Foreign Exchange Reserve Based On Stochastic Programming Model

Foreign exchange reserves are assets that are held by monetary authorities, and they are convertible into foreign currencies at any time. With growing of the foreign exchange reserves, countries are increasing paying attention to active management of foreign exchange reserves. More than ten years ago, Norway and Singapore established special agencies, which were responsible for investment of foreign exchange reserves and were crowned with success. For a long time, the foreign exchange reserve of China has only purchased the government bonds of America, not devote to higher yield. Since China Investment Corp established in 2007, active management of foreign exchange reserve has been brought into schedule. Finding an investment benchmark is the urgent requirement for offering reference for our asset allocation of foreign exchange reserve. Asset and liability management is a good method applied in banks and insurance companies. Applying ALM to the management of foreign exchange reserve is of great significance for improving its rate of return on investment.Firstly, this paper introduced typical ALM models, in which a multi-stage stochastic programming model was emphasized. Then this paper detailed description of the actuality of our foreign exchange reserve investment, putting forward the necessity of creating an ALM model. The stochastic programming model was applied to investment of Chinese foreign exchange reserve. Considering uncertainty of future economic environment, future returns for financial planning models were constructed by using a vector autoregressive model with the monthly data of Germany, USA and Japan from 1990 to 2008, and the rates of return and the exchange rates were anticipated. Then, the multi-stage stochastic programming model was solved with Matlab and we got the best asset allocation method.The result of the model suggests that Chinese foreign exchange reserve was excessively concentrated on dollar assets, especially on U. S. Treasury Bonds. Therefore, the investment yield is low, while we may be subject to the risk of dollar devaluation. In order to improve the investment yield, diversity of investment currencies and instruments must be carried out.