An Empirical Research On Chinese Foreign Exchange Reserve Structure Optimization

Foreign exchange reserve is an important economic variable in open economy. It marks a country’s economic strength and can be used to balance international payments, to intervene foreign exchange market, to maintain national credit. It plays a more important role under the trend of economic globalization. China has the largest foreign exchange reserves of the world in2006and has＄3.82trillion in foreign exchange reserves by the end of2013.We must think how to manage the huge foreign exchange reserves; how to improve its safety, liquidity and profitability and how to optimize its structure.This article will take the qualitative and quantitative research methods to study how to optimize the structure of foreign exchange reserves. Firstly, this paper introduces the situation of foreign exchange reserves in China and qualitatively analyse the influencing factor of the structure of foreign exchange reserves. Secondly, using dates between July2005and January2014as the sample interval to establish arch model of five major currencies’ exchange rate.This paper will study their fluctuation characteristics,predict their volatility of next term and use this volatility to calculation their value at risk. Finally, putting the predicted volatility and expected rate of return of five major currencies into the portfolio selection model to calculate the optimal currency structure of foreign exchange reserves.Thirdly, this paper will join gold price as a variable to analyze how to optimize the structure of foreign exchange reserves from broader perspective. The paper establish ARCH model for gold prices as well, to study its volatility trend. Then use the predicted volatility by GARCH(1,1) model to calculation its value at risk.lastly, using the portfolio selection model calculate the optimal structure contains five major currencies and gold.The empirical research show that:(1) Compared with the optimal structure of foreign exchange reserves, China hold too much dollar assets and the proportion of euro and pound are too low.(2) Putting gold to portfolio can greatly improve the yield of foreign exchange reserves.(3) The value at risk of dollar assets is minimal. Hkd and gold has small value at risk as well. Assets of yen have the maximum risk.(4) It is necessary to intervene the exchange rate of dollar and hkd when they lose balance. On the contrary, the exchange rate of euro, yen, gbp and the gold price can re-balance by itself.(5) Euro, gbp and hkd have leverage effect. Dollar and gold have greater response to good news. We should adjust the structure of reserve timely, according their features.Combined with the conclusions of qualitative analysis and quantitative analysis, this paper will make policy suggestion from three respectives, including:the internationalization of RMB, increasing the proportion of gold reserves, etc.