Mean-Variance Efficiency of Reserve Portfolios

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.