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Download Central Bank Reserves and Sovereign Wealth Management by Arjan B. Berkelaar, Joachim Coche, Ken Nyholm (eds.) PDF

By Arjan B. Berkelaar, Joachim Coche, Ken Nyholm (eds.)

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Extra resources for Central Bank Reserves and Sovereign Wealth Management

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One of the common characteristics of the implementations of the endowment model is that the asset allocations tend to be reasonably active, shifting from one set of assets to others as expected returns are seen to vary over time. One might characterize this behaviour as representing an attempt to stay ahead of the curve, moving into undiscovered or out-of-favor assets before they become popular, and then moving out when other investors start moving in. Some endowments have used significant leverage and many have used derivatives extensively to refine risk exposures and reduce transactions costs.

When foreign exchange earnings show an upward trend, the scale of the sovereign wealth fund should not be expanded even when the expected investment return is high, and the ratio of risky assets should be kept stable and high. When foreign exchange earnings are stabilized and its growth rate slows down, the size of the sovereign wealth fund has a positive correlation with the degree of earnings fluctuation and the expected return on investment. When foreign exchange earnings decrease, the size of the sovereign wealth fund should be expanded even when the expected investment return is low.

There is an increasing consensus that the appropriate investment policy for such assets is one that is less conservative than the traditional strategies for central bank reserves. The first challenge in managing a sovereign wealth fund is to establish the appropriate asset allocation for the fund. This requires an understanding of the purposes of the fund, the nature and timing of future spending, and the risk preferences of its sponsors. Bernard Lee, David Rogal and Fred Weinberger consider two types of sovereign wealth funds: stabilization funds and savings funds.

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