Introduction

Domestic and foreign financial assets of all central banks and public wealth funds worldwide are estimated to have reached in 2007 more than USD 12 billion. Public investors, hence, are important players in global financial markets, and their investment decisions will both matter substantially for their (and hence for the governments') income and for relative financial asset prices. If public institutional investors face such large-scale investment issues, some normative theory of their investment behaviour is obviously of interest. How far would such a theory deviate from a normative theory of investment for typical private large-scale institutional investors, such as pension funds, endowment funds, insurance companies, or mutual funds? Can we rationalize with such a theory what we observe today as central bank investment behaviour? Or would we end concluding like Summers (2007), who compares central bank investment performance with the typical investment performance of pension and endowment funds, that central banks waste considerable public money with an overly restrictive investment approach?

In practice, central bank risk management is extensively using, as it should, risk management methodologies and tools developed and applied by the private financial industry. Those tools will be described in more detail in the following chapters of the book. While public institutions are in this respect not fundamentally different from other institutional investors, important specificities remain, due to public institutions' policy mandate, organizational structure or financial asset types held.