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

Zhang, F and Zhang, Z and Ding, L and Zhang, Z (2014) Optimal Currency Composition for China’s Foreign Reserves: a Copula Approach. The World Economy. pp. 1-19. ISSN 1467-9701

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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.

Item Type: Article
Additional Information: This is the peer reviewed version of the following article: "Optimal Currency Composition for China’s Foreign Reserves: a Copula Approach", in World Economy, 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.
Uncontrolled Keywords: 1402 Applied Economics
Divisions: Liverpool Business School
Publisher: Wiley
Date Deposited: 16 Oct 2015 14:02
Last Modified: 13 Nov 2016 00:50
DOI or Identification number: 10.1111/twec.12237
URI: http://researchonline.ljmu.ac.uk/id/eprint/2180

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