Has the RMB expanded the Efficient Frontier of the SDR?

Abstract

In November 2015, the IMF decided to include the Chinese yuan, which is also called Renminbi (RMB), in the SDR basket currency, and it was implemented from 1 October 2016. The purpose of this study is to analyze whether the SDR denominated bond has become more profitable by adding the RMB into the SDR currency basket. Interest rate and foreign exchange rate data of major currencies such as USD, EUR, GBP, JPY, CNY were used, and the Sharpe ratio comparison and spanning test show that inclusion of the RMB expands the efficient frontier of the SDR. This result is due to the high interest rate of RMB-denominated bonds and the higher foreign exchange gains from the RMB. As China still maintains comparatively high interest rates, the effect of SDR’s efficient frontier expansion by including RMB is likely to continue for some time