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Optimal Currency Composition for China’s Foreign Reserves: a Copula Approach

Zhang, Z.; Ding, L.; Zhang, F.

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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.

Citation

Zhang, Z., Ding, L., & Zhang, F. (2015). Optimal Currency Composition for China’s Foreign Reserves: a Copula Approach. World Economy, 38(12), 1947-1965. https://doi.org/10.1111/twec.12237

Journal Article Type Article
Acceptance Date Sep 22, 2014
Online Publication Date Nov 13, 2014
Publication Date Dec 1, 2015
Deposit Date May 22, 2015
Publicly Available Date Nov 13, 2016
Journal World Economy
Print ISSN 0378-5920
Electronic ISSN 1467-9701
Publisher Wiley
Peer Reviewed Peer Reviewed
Volume 38
Issue 12
Pages 1947-1965
DOI https://doi.org/10.1111/twec.12237
Public URL https://durham-repository.worktribe.com/output/1405063

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Copyright 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.





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