Optimization for Asset Allocation of Foreign Exchange Reserve Based on Multi-objective Programming

Abstract:

The foreign exchange reserve asset considering the needs of transaction, precautions, financial risk management and speculation in turn was proposed. Based on the multi-objective programming model, the optimal scale and structure of China’s foreign exchange reserves in three different situations were studied. The proposed model could give priority to high priority demand and measure the scale and proportion of asset allocation at the same time. The research finds out: in terms of scale, China’s foreign exchange reserves do have the problem of “scale over matching”. The total amount of over matching is about 1.3-2.0 trillion US dollars, which is mainly caused by the “passive” growth caused by transactional demand from 2006 to 2011, and the scale of foreign exchange reserves has changed reasonably since 2011; in terms of structure, China’s foreign exchange reserves should be dominated by bonds and US dollar assets, and the proportion of bonds and US dollar assets should be kept at about 60% ~ 70%. However, the high correlation between China’s actual foreign exchange reserves and US dollar price changes indicates that China’s foreign exchange management authorities may overestimate the impact of US dollar price changes on foreign exchange reserve decision-making for a long time.