This paper compares the performance of various diversification strategies regarding foreign exchange reserves.The aim is to provide central banks with guidelines in portfolio allocation. We pay particular attention to the situation of upward pressures on U.S. interest rates by implementing our analysis over both the whole 1986-2015 period and a rising rate subsample.Relying on geometric tests of mean-variance efficiency, we show that introducing currencies weakly correlated to the USD (AUD and CAD) significantly reduces portfolio risk. Expected return is improved through mortgage-backed securities, corporate bonds, and equities.

Amundi Working Paper - December 2015

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RC - Author - BRIERE Marie
PhD, Head of Investors’ Intelligence Academic Partnership, Amundi Investment Institute
EconomiX-CNRS, Université Paris-Ouest, France. CEPII, France.
Université Libre de Bruxelles (ULB) & CEPR
ULB & New York University (NYU)