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arXiv · 2206.13751

Estimating the Currency Composition of Foreign Exchange Reserves

Matthew Ferranti
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Abstract

Central banks manage about \$12 trillion in foreign exchange reserves, influencing global exchange rates and asset prices. However, some of the largest holders of reserves report minimal information about their currency composition, hindering empirical analysis. I describe a Hidden Markov Model to estimate the composition of a central bank's reserves by relating the fluctuation in the portfolio's valuation to the exchange rates of major reserve currencies. I apply the model to China and Singapore, two countries that collectively hold about \$3.4 trillion in reserves and conceal their composition. I find that both China's reserve composition likely resembles the global average, while Singapore probably holds fewer US dollars.

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Matthew Ferranti. 2022-06-28. Estimating the Currency Composition of Foreign Exchange Reserves. https://arxiv.org/abs/2206.13751

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