Currency Composition Analysis In Foreign Exchange Reserve

Foreign exchange reserve has always been the important issue in the field ofinternational finance, and also been the core of the international monetary system. Inrecent years, China’s foreign exchange reserve grows rapidly. At the end of Dec.2011,China’s foreign exchange reserves had reached$3181100000000.As the foreignexchange reserves grows, the risk which has been exposed is bigger, so how tomanage the risk is becoming an important subject in the field of economy andfinance. After the collapse of the Bretton Woods system, the exchange float freely,and the fluctuation of the exchange rate of foreign exchange reserve becomes animportant issue. In order to avoid this, all countries in the world are trying todiversify their foreign exchange reserves. This article first analyzed the developmentand current situation of China’s foreign exchange reserve, pointed out the main risks,and described the volatility risk theory. At the same time introduced the internationalpopular VaR method to calculate the risk of different currency structure of foreignexchange reserve. In order to improve the precision of VaR value, this articleintroduced the GARCH model to estimate the conditional heteroskedasticity. Alsowe carried on the empirical analysis and established the DCC-GARCH-CVaR modelof China’s foreign exchange reserve which can effectively reduce the risk of foreignexchange reserves. The results show that, in the condition of our country foreignexchange reserve structure, if the risk and the income is caused by the fluctuation ofthe exchange rate,it is appropriated to increase the dollar an the yen ’s share of theassets, while reducing the euro and pound sterling asset share. But at the same time,the currency structure of foreign exchange reserve is also determined by a country’sinternational trade situation, the global economic environment, the income and eventhe foreign politics and other factors. It is not comprehensive if we only carried onthe DCC-GARCH-CVaR model to research the risk of China’s foreign exchangereserve, there are also many other factors need to be explored.