The Swiss Franc exchange rate and deviations from uncovered interest parity: Global vs domestic factors
- 23 Downloads
We examine the role of global and country-specific factors for the Swiss franc exchange rate in the period 1990–2009. Simple asset pricing theory would predict that exchange rates reflect relative movements in national discount factors and that systematic departures from uncovered interest parity can only be explained by international differences in the exposure to the common (global) component of all national discount factors. We extend the methodology of Lustig, Roussanov and Verdelhan (2009) to allow individual currencies’ exposure to this global factor to vary over time as a function of the interest rate differential. This allows us to study the time-varying risk characteristics of individual currency pairs. We find that the Swiss franc acts as a safe haven against some currencies — notably for dollar-based investors — but not for all, specifically not the euro. Also, the extent to which global factors have weighed on the Swiss franc exchange rate has varied over the sample period and appears more subdued in the global low interest rate environment of the last decade.
Keywordscurrency risk exchange rate save haven effects uncovered interest parity (UIP)
JEL-ClassificationF31 F36 G12
- Kugler, Peter, and Beatrice Werder (2002), “The Puzzle of the Swiss Interest Island: ‘Stylized Facts and a New Interpretation’”, Aussenwirtschaft, 57, pp. 49–63.Google Scholar
- Kugler, Peter, and Beatrice Werder (2004), “International Portfolio Holdings and Swiss Franc Returns”, Schweizerische Zeitschrift für Volkswirtschaft und Statistik, 140, pp. 301–325.Google Scholar
- Kugler, Peter, and Beatrice Werder (2005), “Why are Returns on Swiss Franc Asset so Low?”, Applied Economics Quarterly, 51(3), pp. 231–246.Google Scholar
- Kugler, Peter, and Beatrice Werder (2009), “The Demise of the Swiss Interest Rate Puzzle”, SNB–IMF Conference on Exchange Rates.Google Scholar
- Lenz, Carlos, and Marcel Savioz (2009), “Monetary Determinants of the Swiss Franc”, paper presented at the annual conference of the Swiss Society of Economics and Statistics, Lausanne 2009.Google Scholar
- Lustig, Hanno, Nick Roussanov and Adrien Verdelhan (2009), “Common Risk Factors in Currency Markets”, Finance International Meeting AFFI– EUROFIDAI, Paris, December 2008. Available at SSRN: http://ssrn.com/abstract=1139447.
- Ranaldo, Angelo, and Paul Söderlind (2007), “Safe Haven Currencies”, Swiss National Bank Working Papers, 17.Google Scholar
- Roth, Jean-Pierre (2008), “The Exchange Rate and Swiss Monetay Policy”, address to the SNB–CEPR conference Foreign Currency Related Risk Taking by Financial Institutions, Firms and Households, Zurich, September 22, 2008.Google Scholar