Diversification Effect of Gold as an Asset Class in Foreign Exchange Reserve Portfolio, Evidence from Sri Lanka

Roshan Harshapriya

doi:doi:10.11648/j.ijefm.20241205.14

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Diversification Effect of Gold as an Asset Class in Foreign Exchange Reserve Portfolio, Evidence from Sri Lanka

Roshan Harshapriya^*

Published in International Journal of Economics, Finance and Management Sciences (Volume 12, Issue 5)

Received: 14 August 2024 Accepted: 5 September 2024 Published: 20 September 2024

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Abstract

Foreign Exchange Reserves of the countries play a major role in managing exchange rate and monetary policy, particularly in emerging countries as Sri Lanka. Therefore, it is important to manage foreign exchange reserves in an open and transparent manner with clear objectives of what is going to be achieved. For a country like Sri Lanka the main objective would be the safety of the assets since it is difficult to absorb substantial risks in managing foreign exchange reserves due to relative lower size compared to its exposure to external sector of the economy. When it comes to gold as an assets class is considered to safe-haven assets due to its nature of higher return in times of crisis and inflationary periods. The objective of this study is to explore the diversification impact of gold on foreign exchange reserves in Sri Lanka for the period from 2007 to 2023. To explore the impact of diversification, correlation between gold and existing foreign exchange reserves and additional excess return per unit of risk provide with the inclusion of gold into the portfolio were used to analyze the possible diversification impact. The results showed that there is an increase in excess return with the addition of 1% to 5% of gold as a percentage of total foreign exchange reserves, while correlation of gold with existing portfolio was less than 0.5 indicating diversification impact. Further, the Sharpe ratio was also seen increasing when the gold composition in foreign exchange reserve portfolio was increased. It was found that gold can be considered as an asset class which help diversification for foreign exchange reserves of Sri Lanka, even though the same are managed in very conservatively.

Published in	International Journal of Economics, Finance and Management Sciences (Volume 12, Issue 5)
DOI	10.11648/j.ijefm.20241205.14
Page(s)	267-275
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2024. Published by Science Publishing Group

Keywords

Foreign Exchange Reserves, Diversification, Correlation, Sharpe Ratio

References

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[3]	Capie, F., Mills, T. C., & Wood, G. Gold as a hedge against the dollar. Journal of International Financial Markets, Institutions and Money, 15(4). (2015), 343-352.
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[7]	Chua, J. H., Sick, G., & Woodward, R. S. (1990). Diversifying with gold stocks. Financial Analysts Journal, 46(4). (1990), 76–79. https://doi.org/10.2469/faj.v46.n4.76
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[11]	Fernando, N. Shalinda. “The Role of Gold in an Investment Portfolio: An empirical study on diversification benefits of gold from the perspective of Swedish investors.” (2017). https://api.semanticscholar.org/CorpusID:169010890
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[17]	Nugee, J “Foreign Exchange Reserves Management”, Bank of England. (2000).
[18]	Nusantara, Agung & Nawatmi, Sri & Santosa, Agus & Sudiyatno, Bambang The Role of Gold as Haven or Diversifier Investment in Indonesia. https://doi.org/10.21203/rs.3.rs-789580/v1 (2021).
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APA Style

Harshapriya, R. (2024). Diversification Effect of Gold as an Asset Class in Foreign Exchange Reserve Portfolio, Evidence from Sri Lanka. International Journal of Economics, Finance and Management Sciences, 12(5), 267-275. https://doi.org/10.11648/j.ijefm.20241205.14

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ACS Style

Harshapriya, R. Diversification Effect of Gold as an Asset Class in Foreign Exchange Reserve Portfolio, Evidence from Sri Lanka. Int. J. Econ. Finance Manag. Sci. 2024, 12(5), 267-275. doi: 10.11648/j.ijefm.20241205.14

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AMA Style

Harshapriya R. Diversification Effect of Gold as an Asset Class in Foreign Exchange Reserve Portfolio, Evidence from Sri Lanka. Int J Econ Finance Manag Sci. 2024;12(5):267-275. doi: 10.11648/j.ijefm.20241205.14

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@article{10.11648/j.ijefm.20241205.14,
  author = {Roshan Harshapriya},
  title = {Diversification Effect of Gold as an Asset Class in Foreign Exchange Reserve Portfolio, Evidence from Sri Lanka
},
  journal = {International Journal of Economics, Finance and Management Sciences},
  volume = {12},
  number = {5},
  pages = {267-275},
  doi = {10.11648/j.ijefm.20241205.14},
  url = {https://doi.org/10.11648/j.ijefm.20241205.14},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijefm.20241205.14},
  abstract = {Foreign Exchange Reserves of the countries play a major role in managing exchange rate and monetary policy, particularly in emerging countries as Sri Lanka. Therefore, it is important to manage foreign exchange reserves in an open and transparent manner with clear objectives of what is going to be achieved. For a country like Sri Lanka the main objective would be the safety of the assets since it is difficult to absorb substantial risks in managing foreign exchange reserves due to relative lower size compared to its exposure to external sector of the economy. When it comes to gold as an assets class is considered to safe-haven assets due to its nature of higher return in times of crisis and inflationary periods. The objective of this study is to explore the diversification impact of gold on foreign exchange reserves in Sri Lanka for the period from 2007 to 2023. To explore the impact of diversification, correlation between gold and existing foreign exchange reserves and additional excess return per unit of risk provide with the inclusion of gold into the portfolio were used to analyze the possible diversification impact. The results showed that there is an increase in excess return with the addition of 1% to 5% of gold as a percentage of total foreign exchange reserves, while correlation of gold with existing portfolio was less than 0.5 indicating diversification impact. Further, the Sharpe ratio was also seen increasing when the gold composition in foreign exchange reserve portfolio was increased. It was found that gold can be considered as an asset class which help diversification for foreign exchange reserves of Sri Lanka, even though the same are managed in very conservatively.
},
 year = {2024}
}

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TY  - JOUR
T1  - Diversification Effect of Gold as an Asset Class in Foreign Exchange Reserve Portfolio, Evidence from Sri Lanka

AU  - Roshan Harshapriya
Y1  - 2024/09/20
PY  - 2024
N1  - https://doi.org/10.11648/j.ijefm.20241205.14
DO  - 10.11648/j.ijefm.20241205.14
T2  - International Journal of Economics, Finance and Management Sciences
JF  - International Journal of Economics, Finance and Management Sciences
JO  - International Journal of Economics, Finance and Management Sciences
SP  - 267
EP  - 275
PB  - Science Publishing Group
SN  - 2326-9561
UR  - https://doi.org/10.11648/j.ijefm.20241205.14
AB  - Foreign Exchange Reserves of the countries play a major role in managing exchange rate and monetary policy, particularly in emerging countries as Sri Lanka. Therefore, it is important to manage foreign exchange reserves in an open and transparent manner with clear objectives of what is going to be achieved. For a country like Sri Lanka the main objective would be the safety of the assets since it is difficult to absorb substantial risks in managing foreign exchange reserves due to relative lower size compared to its exposure to external sector of the economy. When it comes to gold as an assets class is considered to safe-haven assets due to its nature of higher return in times of crisis and inflationary periods. The objective of this study is to explore the diversification impact of gold on foreign exchange reserves in Sri Lanka for the period from 2007 to 2023. To explore the impact of diversification, correlation between gold and existing foreign exchange reserves and additional excess return per unit of risk provide with the inclusion of gold into the portfolio were used to analyze the possible diversification impact. The results showed that there is an increase in excess return with the addition of 1% to 5% of gold as a percentage of total foreign exchange reserves, while correlation of gold with existing portfolio was less than 0.5 indicating diversification impact. Further, the Sharpe ratio was also seen increasing when the gold composition in foreign exchange reserve portfolio was increased. It was found that gold can be considered as an asset class which help diversification for foreign exchange reserves of Sri Lanka, even though the same are managed in very conservatively.

VL  - 12
IS  - 5
ER  -

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Author Information

Roshan Harshapriya

Department of Management Studies, University of Sri Jayawardenapura, Nugegoda, Sri Lanka

Contact Email

http://orcid.org/0009-0001-2471-4396

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APA Style

Harshapriya, R. (2024). Diversification Effect of Gold as an Asset Class in Foreign Exchange Reserve Portfolio, Evidence from Sri Lanka. International Journal of Economics, Finance and Management Sciences, 12(5), 267-275. https://doi.org/10.11648/j.ijefm.20241205.14

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ACS Style

Harshapriya, R. Diversification Effect of Gold as an Asset Class in Foreign Exchange Reserve Portfolio, Evidence from Sri Lanka. Int. J. Econ. Finance Manag. Sci. 2024, 12(5), 267-275. doi: 10.11648/j.ijefm.20241205.14

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AMA Style

Harshapriya R. Diversification Effect of Gold as an Asset Class in Foreign Exchange Reserve Portfolio, Evidence from Sri Lanka. Int J Econ Finance Manag Sci. 2024;12(5):267-275. doi: 10.11648/j.ijefm.20241205.14

Copy | Download

@article{10.11648/j.ijefm.20241205.14,
  author = {Roshan Harshapriya},
  title = {Diversification Effect of Gold as an Asset Class in Foreign Exchange Reserve Portfolio, Evidence from Sri Lanka
},
  journal = {International Journal of Economics, Finance and Management Sciences},
  volume = {12},
  number = {5},
  pages = {267-275},
  doi = {10.11648/j.ijefm.20241205.14},
  url = {https://doi.org/10.11648/j.ijefm.20241205.14},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijefm.20241205.14},
  abstract = {Foreign Exchange Reserves of the countries play a major role in managing exchange rate and monetary policy, particularly in emerging countries as Sri Lanka. Therefore, it is important to manage foreign exchange reserves in an open and transparent manner with clear objectives of what is going to be achieved. For a country like Sri Lanka the main objective would be the safety of the assets since it is difficult to absorb substantial risks in managing foreign exchange reserves due to relative lower size compared to its exposure to external sector of the economy. When it comes to gold as an assets class is considered to safe-haven assets due to its nature of higher return in times of crisis and inflationary periods. The objective of this study is to explore the diversification impact of gold on foreign exchange reserves in Sri Lanka for the period from 2007 to 2023. To explore the impact of diversification, correlation between gold and existing foreign exchange reserves and additional excess return per unit of risk provide with the inclusion of gold into the portfolio were used to analyze the possible diversification impact. The results showed that there is an increase in excess return with the addition of 1% to 5% of gold as a percentage of total foreign exchange reserves, while correlation of gold with existing portfolio was less than 0.5 indicating diversification impact. Further, the Sharpe ratio was also seen increasing when the gold composition in foreign exchange reserve portfolio was increased. It was found that gold can be considered as an asset class which help diversification for foreign exchange reserves of Sri Lanka, even though the same are managed in very conservatively.
},
 year = {2024}
}

Copy | Download

TY  - JOUR
T1  - Diversification Effect of Gold as an Asset Class in Foreign Exchange Reserve Portfolio, Evidence from Sri Lanka

AU  - Roshan Harshapriya
Y1  - 2024/09/20
PY  - 2024
N1  - https://doi.org/10.11648/j.ijefm.20241205.14
DO  - 10.11648/j.ijefm.20241205.14
T2  - International Journal of Economics, Finance and Management Sciences
JF  - International Journal of Economics, Finance and Management Sciences
JO  - International Journal of Economics, Finance and Management Sciences
SP  - 267
EP  - 275
PB  - Science Publishing Group
SN  - 2326-9561
UR  - https://doi.org/10.11648/j.ijefm.20241205.14
AB  - Foreign Exchange Reserves of the countries play a major role in managing exchange rate and monetary policy, particularly in emerging countries as Sri Lanka. Therefore, it is important to manage foreign exchange reserves in an open and transparent manner with clear objectives of what is going to be achieved. For a country like Sri Lanka the main objective would be the safety of the assets since it is difficult to absorb substantial risks in managing foreign exchange reserves due to relative lower size compared to its exposure to external sector of the economy. When it comes to gold as an assets class is considered to safe-haven assets due to its nature of higher return in times of crisis and inflationary periods. The objective of this study is to explore the diversification impact of gold on foreign exchange reserves in Sri Lanka for the period from 2007 to 2023. To explore the impact of diversification, correlation between gold and existing foreign exchange reserves and additional excess return per unit of risk provide with the inclusion of gold into the portfolio were used to analyze the possible diversification impact. The results showed that there is an increase in excess return with the addition of 1% to 5% of gold as a percentage of total foreign exchange reserves, while correlation of gold with existing portfolio was less than 0.5 indicating diversification impact. Further, the Sharpe ratio was also seen increasing when the gold composition in foreign exchange reserve portfolio was increased. It was found that gold can be considered as an asset class which help diversification for foreign exchange reserves of Sri Lanka, even though the same are managed in very conservatively.

VL  - 12
IS  - 5
ER  -

Copy | Download