Autori
Lundquist, Jacob
Verner, Dorte

Titolo
Optimal allocation of foreign debt solved by a multivariate Garch model applied to Danish data
Periodico
European University Institute of Badia Fiesolana (Fi). Department of Economics - Working papers
Anno: 1996 - Fascicolo: 28 - Pagina iniziale: 1

This paper considers a foreign currency management problem and presents an optimal dynamic hedging portfolio model based on the associated intertemporal capital asset pricing model. The central idea is that an institution, e.g. the Central Bank or Treasury in a small open economy, which manages foreign government debt and reserves aims to hedge against fluctuations in exchange rates and terms of trade with the outcome being an optimal hedging portfolio, which is itself a function of timevarying variances and covariances. Implementing this economic model calls for a statistical model permitting second moments to change through time, e.g. a multivariate GARCH model. The model herein is applied to Danish data and estimates three types of debt portfolios for Denmark, one with ten, seven, and four currencies. When estimating one type - the ten equation system - it is found that a large share of the foreign debt should be placed in BEF, DEM and a little in CHF. Reserves should be placed, for the majority, in FRF and ESB and the relative shares of each currency changed from quarter to quarter according to the changing covariances. When the number of currencies is reduced to four, CHF, DEM, JPY and USD, Denmark would still have a net debt in DEM and CHF, but the share of USD in the foreign reserves would have increased.



Testo completo: http://hdl.handle.net/1814/600

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