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Political and economic uncertainty, foreign reserves accumulation and cross-market volatility spillovers

Supervisors

Professor Zhaoyong Zhang

Abstract

The accumulation of foreign exchange reserves in Asian economies, led by China and Japan, has continued on an unprecedented scale for the past several decades, which is on general perception too large to be justified by precautionary motives.  The US dollar has been the dominant international reserve currency with its outsized role in global trade invoicing, international debt, and cross-border borrowing and lending. Yet with rise of nontraditional reserve currencies and internationalization of Chinese RMB, US dollar hegemony has been declining since the end of the 1990s. This research project aims to empirically and systematically investigate what factors determine the currency composition of central bank reserve portfolios, and drive the foreign exchange reserve hoarding in these Asian countries, and how exogenous shocks (political & economic uncertainty) affect their reserve hoarding behavior and the cross-market & cross-border volatility spillovers in the context of the regional financial market integration and Chinese RMB internationalization.

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