Strategic Asset Allocation of a Reserves’ Portfolio: Hedging Against Shocks

Central bank reserves function as a liquidity buffer to mitigate country exposure and vulnerability external shocks. Emerging Market Economies are the countries most exposed volatility of capital flows have usually preferred build up large war-chests international self-insurance mechanism, it is under their full discretion. Nevertheless, standard practice immobilizing amounts “cash” insure against jumps in risk-aversion could be enhanced. The inclusion hedging strategies strategic asset allocation decision can help enhance risk management national balance sheet, transferring funds those scenarios when needed. This paper presents practical approach that we propose analysis central bank, explore benefits including construction efficient portfolio correlations between reserves’ country’s main vulnerabilities