BIS Papers No 58
Portfolio and risk management for central banks and sovereign wealth funds Proceedings of a joint conference organised by the BIS, the ECB and the World Bank in Basel, 23 November 2010
Banking
October 2011
JEL classification: E58, F33, G11
Papers in this volume were prepared for a conference organised by the Bank for International Settlements, the European Central Bank and the World Bank in Basel on 23 November 2010. The views expressed are those of the authors and do not necessarily reflect the views of the BIS or the institutions represented at the meeting. Individual papers (or excerpts thereof) may be reproduced or translated with the authorisation of the authors concerned.
This publication is available on the BIS website (www.bis.org).
Bank for International Settlements 2011. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated.
ISSN 1609-0381 (print) ISBN 92-9131-888-4 (print)
ISSN 1682-7651 (online) ISBN 92-9197-888-4 (online)
BIS Papers No 58 iii
Programme
Tuesday 2 November
09:00 Welcoming remarks by the organizers Bank for International Settlements (BIS), European Central Bank (ECB) and World Bank
09:15 Keynote address: Financial turbulence and international investment Robert Z Aliber, University of Chicago
Reserve management
Chair: Roberts Grava, World Bank
10:15 Managing foreign exchange reserves in the crisis and after Robert N McCauley and Jean-Franois Rigaudy, BIS
Discussant: Han van der Hoorn, IMF
11:30 Diversifying market and default risk in high grade sovereign bond portfolios Myles Brennan, Adam Kobor and Vidhya Rustaman, World Bank
Discussant: Fernando Monar, ECB
12:15 Sovereign credit scorecard Martin Hohensee, Deutsche Bank, Singapore
Discussant: Antonio Scalia, Bank of Italy
Break-out sessions
Active management Chair: Pierre Cardon, BIS
Portfolio construction Chair: Gabriel Petre, World Bank
14:30 Simple and optimal alpha strategy selection and risk budgeting Robert Scott, Schroder Investment Management, London
Including linkers in a sovereign bond portfolio: an HJM approach Ricardo Selves and Marcin Stamirowski, European Commission
15:00 Active portfolio management in the public sector Vahe Sahakyan, BIS
Hedging inflation risk with domestic investment and foreign currency in a developing economy Marie Brire and Ombretta Signori, Amundi, Paris
15:30 Explaining the returns of active currency managers Sam Nasypbek, World Bank, and Scheherazade S Rehman, George Washington University
Fundamental allocation for government bond portfolios Cyril Caillault, Lombard Odier Darier Hentsch Investment Managers, Geneva
iv BIS Papers No 58
Tuesday 2 November (cont)
Quantitative techniques Chair: Jean-Pierre Matt, BIS
Risk management Chair: Ken Nyholm, ECB
16:30 Optimal active portfolio management and relative performance drivers: theory and evidence Roberto Violi, Bank of Italy
An option theoretic model for ultimate loss-given-default with systematic recovery risk and stochastic returns on defaulted debt Michael Jacobs, Jr, Office of the Comptroller of the Currency, Washington DC
17:00 Portfolio optimization and long-term dependence Carlos Len, Central Bank of Colombia, and Alejandro Reveiz, World Bank
Securitization rating performance and agency incentives Daniel Rsch, University of Hanover, and Harald Scheule, University of Melbourne
17:30 Combining equilibrium, resampling, and analysts views in portfolio optimization Jos Luiz Barros Fernandes and Jos Renato Haas Ornelas, Central Bank of Brazil, and Oscar Augusto Martnez Cusicanqui, Central Bank of Bolivia
Stress testing central banks and sovereign wealth funds Himadri Bhattacharya, Tata Capital Limited, Mumbai; Jerome Kreuser, The RisKontrol Group, Berne; and Sivaprakasam Sivakumar, Argonaut Capital Partners LLC, Boston
Wednesday 3 November
Sovereign wealth management Chair: Evangelos Tabakis, ECB
09:00 Rethinking asset allocation for institutional investors Arjan B Berkelaar and Ali AlMansour, KAUST Investment Management Co, Arlington
Discussant: David Bolder, BIS
09:45 The impact of foreign government investments: sovereign wealth fund investments in the United States Elvira Sojli, Rotterdam School of Management, Erasmus University, and Wing Wah Tham, Erasmus School of Economics, Erasmus University, Rotterdam
Discussant: Solomon Tadesse, State Street Global Advisors
BIS Papers No 58 v
Wednesday 3 November (cont)
Reserve management Chair: Robert N McCauley, BIS
10:45 Is gold a hedge or a safe haven? An analysis of stocks, bonds and gold Constantin Gurdgiev, IBM and Trinity College, Dublin
Discussant: Natalie Dempster, World Gold Council, London
11:30 Brazilian strategy for managing the risk of foreign exchange rate exposure during a crisis Antonio Francisco A Silva Jr, Central Bank of Brazil
Discussant: Kurmas Akdogan, Central Bank of the Republic of Turkey
12:15
Should larger reserve holdings be more diversified? Roland Beck and Sebastian Weber, ECB
Discussant: Joachim Coche, BIS
13:00 Closing remarks
BIS Papers No 58 vii
Contents
Programme ............................................................................................................................ iii
Introduction...............................................................................................................................1
Financial turbulence and international investment Robert Z Aliber..........................................................................................................................5
Managing foreign exchange reserves in the crisis and after Robert N McCauley and Jean-Franois Rigaudy ...................................................................19
Diversifying market and default risk in high grade sovereign bond portfolios Myles Brennan, Adam Kobor and Vidhya Rustaman .............................................................49
Combining equilibrium, resampling, and analysts views in portfolio optimization Jos Luis Barros Fernandes, Jos Renato Haas Ornelas and Oscar Augusto Martnez Cusicanqui ......................................................................................75
Portfolio optimization and long-term dependence Carlos Len and Alejandro Reveiz .........................................................................................85
Including linkers in a sovereign bond portfolio: an HJM approach Ricardo Selves and Marcin Stamirowski ..............................................................................111
Inflation hedging portfolios in different regimes Marie Brire and Ombretta Signori .......................................................................................139
The role of SDR-denominated securities in official and private portfolios George Hoguet and Solomon Tadesse ................................................................................165
Optimal active portfolio management and relative performance drivers: theory and evidence Roberto Violi .........................................................................................................................187
Explaining the returns of active currency managers Sam Nasypbek and Scheherazade S Rehman ....................................................................211
An option theoretic model for ultimate loss-given-default with systematic recovery risk and stochastic returns on defaulted debt Michael Jacobs, Jr ................................................................................................................257
Securitization rating performance and agency incentives Daniel Rsch and Harald Scheule........................................................................................287
BIS Papers No 58 1
Introduction1
This volume is a collection of papers presented at the Third Public Investors Conference, which was jointly organized by the Bank for International Settlements (BIS), the European Central Bank (ECB) and the World Bank (WB). This event, which took place on 23 November 2010 at the BISs head office in Basel, brought together over 80 participants from more than 50 institutions comprising central banks, sovereign wealth funds and public pension funds.
The main aim of the current as well as previous Public Investor Conferences has been to create a forum where academics and private and public sector investment professionals can meet to discuss and ponder the issues of specific relevance to public sector investors. It is well recognized that public institutions differ markedly from their private sector peers in their investment activities. Investment rationales, preferences, eligible investments, governance structures and accountabilities as well as aspects relating to the availability of human and technical resources distinguish public investors. These idiosyncrasies have profound effects on how portfolio and risk management activities are organized and performed in public sector institutions.
Having discussed initial reactions to the financial crisis at the Second Public Investors Conference held at the World Bank in Washington DC, the 2010 Conference focused on how public investors are revising asset allocations and investment processes in response to the new financial market environment. Faced with high growth rates in foreign reserves and other pools of publicly managed funds, public investors