Central bank reserves management and the active vs passive debate

Arnab Das and co-researchers explain that the question of when and how does it make sense for a central bank to actively manage.

Oct 12, 2018 | Arnab Das, Jennifer Johnson-Calari and Adam Kobor

What role does active management play in the context of central bank reserves management? In this whitepaper, Arnab Das and co-researchers explain that the question of active or passive management is a false dichotomy – both can and should exist at different levels of the investment decision making process, with active risk decisions taken by those portfolio managers closest to the market.

At the policy level, they argue that a rules-based approach is superior and investment returns can suffer when decision-makers seek to time market turns. At the portfolio manager level, however, their empirical studies indicate that active portfolio managers tend to beat market benchmarks, before costs, but outcomes differ across asset classes and time.

Central banks are important participants in financial markets and active management is critical not only to achieve excess returns but also for functioning markets. The study illustrates that there is ample room to actively manage and outperform market capitalization weighted indices, particularly in fixed income markets, while controlling downside risks and central banks do have some advantages in seeking to enhance returns through active management relative to other market participants.

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