Mean-Variance Efficiency of Reserve Portfolios

Abstract

This paper analyzes the mean-variance efficiency of the reserve

portfolios of central banks in an effort to shed light on the recent

debate regarding the need for portfolio diversification. Using likelihood

ratio test statistics, we examine the efficiency of the reserve portfolios

of 18 countries from 2000 to 2009. The null hypothesis of efficiency

is rejected for approximately half of the countries. However, overall

inefficiency appears to have decreased over time, particularly in those

countries that previously had inefficient portfolio diversification. Along

with the continued dominance of the US dollar in reserve portfolios,

our findings suggest that the status of the US dollar as an international

reserve currency did not decline.