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Optimal currency composition for China's foreign reserves : a copula approach.

Zhang, Z. and Ding, L. and Zhang, F. and Zhang, Z. (2015) 'Optimal currency composition for China's foreign reserves : a copula approach.', World economy., 38 (12). pp. 1947-1965.

Abstract

This paper investigates the optimal currency composition for a country's foreign reserves. In the context of China, we examine the asymmetric, fat-tail and complex dependence structure in distributions of currency returns. A skewed, fat-tailed and pair-copula construction is then built to capture features of higher moments. In a D-vine copula approach, we show that under the disappointment aversion effect, the central bank in our model can achieve sizeable gains in expected economic value from switching from the mean-variance to copula modelling. We find that this approach will lead to an optimal currency composition that allows China to have more space for international currency diversification while maintaining the leading position of the US dollar in the currency shares of China's reserves.

Item Type:Article
Full text:(AM) Accepted Manuscript
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Status:Peer-reviewed
Publisher Web site:http://dx.doi.org/10.1111/twec.12237
Publisher statement:This is the accepted version of the following article: Zhang, Z., Ding, L., Zhang, F. and Zhang, Z. (2014), Optimal Currency Composition for China's Foreign Reserves: A Copula Approach. World Economy, 38(12): 1947-1965, which has been published in final form at http://dx.doi.org/10.1111/twec.12237. This article may be used for non-commercial purposes in accordance With Wiley Terms and Conditions for self-archiving.
Record Created:26 May 2015 10:20
Last Modified:13 Nov 2016 00:36

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