A Study On Structure Optimization And Investment Strategy Of Foreign Exchange Reserves--Exchange Rate Risk Perspective

Faced with several unfavorable external factors, such as high volatility in the currency markets, shrink in the value of foreign exchange reserves and loss of foreign exchange investment, China’s administration will face large challenges to effectively manage such high foreign exchange reserves, thus having the urgency to establish a scientific and advanced management system of foreign exchange reserves. Under the circumstance of global economic imbalances, this paper, combined with theoretical analyses and empirical researches, studies currency structure optimization and investment strategy of foreign exchange reserves, from the perspective of exchange rate risks.Firstly, we make an attempt to analyze exchange rate structure risks. After qualitatively describing the situation of dissymmetric flow of capital and currency caused by global imbalance, we use AR-GARCH model to measure the risks of exchange rate of RMB to US Dollar. Then we adopt the data of currency index and exchange rate between some developed countries to study exchange rate risk and the influence among them. Based on the researches above, we analyze the structural exchange rate imbalance in the international environment so as to provide some theoretical basis for structure optimization in foreign exchange reserves.In terms of the studies of structure optimization in foreign exchange reserves, we refer to the data provided by COFER database concerning currency structure in China’s foreign exchange reserves and use the classical Mean-Variance model to conduct an empirical research of the asset allocation and structure optimization in foreign exchange reserves via Matlab software. The empirical result reveals that we ought to reduce the proportion of U.S. dollars proportionally, increase the ratio of Euro and Bounds and maintain a constant percentage of Yen. In addition, the increment of gold reserves can improve the optimal allocation of international reserves and reduce some systematic risks.In the aspect of foreign exchange investment, based on the analysis of optimal foreign exchange reserves structure, the paper studies some active strategies of foreign reserves investment. At first, we sort out the principles of foreign exchange investments, and then analyze the existing channels and the necessity and feasibility of expounding active investment of China’s foreign exchange reserves at the theoretical level. Secondly, based upon global asset allocation theories, this paper introduces Copula function and uses Matlab, SPSS and Excel software to build Copula-CVaR model through Monte Carlo simulation. Then, by means of numerical simulation, we calculate the investment risks and returns in different capital markets to determine the optimal ratios between their debt and equity investments. The empirical results indicate that the investment risk in U.S. capital market is relatively larger and holdings of U.S. bonds should be appropriately decreased to reduce the risk of investment portfolio. For capital markets in other developed countries, managers should take treasury bonds as the main investment tools and maintain them a high share in the investment portfolio, which can take advantage of low-risk property in bonds and high-yield one in stocks to fully disperse portfolio risks and successfully achieve the optimal results in foreign exchange investments.