Swiss Franc Exchange Rate Research Articles

Modelling Foreign Exchange Interventions under Rayleigh Process: Applications to Swiss Franc Exchange Rate Dynamics.

This paper models the foreign exchange intervention policy following the Rayleigh process derived from the standard flexible-price monetary framework. The exchange rate dynamics associated with the interventions are more sensitive to the change in the economic fundamental when a currency’s money supply is ample and its appreciation expectation cannot be offset by lower interest rates that have fallen to the zero lower bound, suggesting that more intensive interventions are required to counteract currency appreciation pressure and resulting in foreign reserve accumulation. The empirical results using market data during January 2015–February 2020 demonstrate that the model can describe the dynamics of the Swiss franc exchange rate. The accumulation of foreign reserves through interventions is negatively co-integrated with the exchange rate volatility and the value of the mean level of the Swiss franc exchange rate in the dynamics, to some extent indicating a reasonably high degree of effectiveness of the Swiss National Bank’s interventions. The transition between the target-zone and floating-rate regimes in 2015 caused changes in the level of exchange rate volatility but not its dynamical structure, suggesting that transitions between the floating-rate and target-zone regimes do not seem to have material consequence in this regard.

Global risk sentiment and the Swiss franc: A time-varying daily factor decomposition model

This paper develops an FX factor model to decompose short-term bilateral exchange rate dynamics into different global factors and local uniqueness. We apply the model to the Swiss franc exchange rates against the US dollar (USDCHF) and the euro (EURCHF) between 2006 and 2018 and decompose daily dynamics into three global factors: risk, US dollar, and euro. The model captures daily dynamics well, explaining approximately 73% of the variation in USDCHF and 37% of the variation in EURCHF, reflecting the importance of global factors for Swiss franc exchanges rates. The risk factor contributes the most to Swiss franc dynamics, especially in times of a worsening risk environment, highlighting the role of the Swiss franc as a safe-haven currency. Global factors had been almost completely reflected in USDCHF dynamics before the euro area debt crisis, but once that crisis began, they also became important for EURCHF. In a case study of the introduction of the EURCHF minimum exchange rate we showcase the importance of momentum in daily Swiss franc returns.

Foreign Exchange Dynamics and Reserve Accumulation under Capital Inflows

When a currency’s appreciation expectation cannot be offset by lower interest rates which have fallen to the zero lower bound, the monetary authority needs to intervene to prevent currency appreciation due to capital inflows and resulting in foreign reserve accumulation. Based on a standard flexible-price monetary framework, this paper extends a target-zone model in which the intervention policy is incorporated by specifying the asymmetric mean-reverting fundamental dynamics with the smooth-pasting condition at a moving boundary. The solution of the model shows that the exchange rate dynamics is more sensitive to the change in the fundamental when the domestic interest rate is constrained at zero, suggesting more intensive interventions are required to counteract currency appreciation pressure. The empirical results using market data during January 2015 – February 2020 demonstrate that the model can describe the dynamics of the Swiss franc exchange rate following the mean-reverting square-root process. The accumulation of foreign reserves through interventions is negatively co-integrated with the exchange rate volatility and the value of the mean level of the Swiss franc exchange rate in the dynamics, to some extent indicating a reasonably high degree of effectiveness of the Swiss National Bank’s interventions.

Carry trade and forward premium puzzle from the perspective of a safe‐haven currency

AbstractSwiss franc exchange rates exhibit safe‐haven characteristics, which suggest a close link between the forward premium puzzle and profitability of the carry trade. Our analysis of Swiss franc exchange rates shows that the two phenomena are distinct from each other, thus corroborating U.S. dollar evidence. Persistent exposures to two different global shocks drive the two phenomena in Swiss franc exchange rates. Moreover, we find significant links between expected average Swiss franc exchange rate changes and macroeconomic conditions during the period of the minimum Swiss franc exchange rate against the euro, but not during the rest of the sample period.

Revisiting the weak-form efficiency of the EUR/CHF exchange rate market: Evidence from episodes of different Swiss franc regimes

Based on ultrahigh-frequency returns, this paper comprehensively revisits the weak-form efficiency of the euro to Swiss franc (EUR/CHF) exchange rate market from 2002 to 2017, including the efficiency of several long periods and intraday efficiency. To this end, we employ Hurst index as the indicator of the degree of efficiency. The Jarque–Bera test demonstrates that the high-frequency logarithm return of EUR/CHF does not accord with a normal distribution. Further, a strict statistical test in the spirit of bootstrapping is performed to validate the statistical significance of Hurst indices of the EUR/CHF exchange rate returns. The results indicate that the EUR/CHF exchange rate market possesses an extremely mild anti-persistence when the full sample is investigated. Similarly, a weak anti-persistence is also found in five fixed sub-samples which can been roughly split into “free float” periods and “intervention” periods owing to the SNB’s interventions. When it comes to the intraday efficiency tests on EUR/CHF exchange rate market, we find the majority of intraday Hurst indices follow a downward departure from 0.5, which roughly provides an evidence for intraday market inefficiency. Overall, at the level of long period returns, the Hurst values show an approach to 0.5, whereas most Hurst indices of intraday returns exhibit a relatively large deviation from 0.5. Besides, the intraday Hurst indices present that the announcement of lower bound can be approximatively regarded as a turning point of the market efficiency, which potentially indicates that the SNB’s interventions might reduce the efficiency of the studied market.

Consumers´ Cross-Border Shopping Behaviour in the City of Konstanz

A significant and sudden change in the Swiss franc exchange rate has led to a sharp rise in cross-border shopping in German border towns. For German businesses, the appearance of massive streams of visitors from their neighbouring country is a gratifying and highly lucrative development. A survey of passers-by in the Konstanz marketplace was conducted to shed more light on cross-border consumer behaviour. To investigate the proportion of Swiss consumers, their purchasing power, purchasing preferences and motives of shoppers, five hypotheses were derived, and data were collected, analysed and evaluated. Overall, there are some remarkable differences between the behaviour of Swiss and German visitors to the Konstanz marketplace. Consumers from Switzerland generally visit the marketplace less often but bring a significantly higher budget with them. They are also generally more satisfied with the Konstanz marketplace. Surprisingly, despite the price levels, VAT refunds play a subordinate role for Swiss customers.

The Swiss franc safety premium

This paper applies a recent method proposed by Maggiori (The U.S. Dollar Safety Premium, 2013) to estimate the Swiss franc safety premium. The results show that the three-step instrumental variable approach as used by Maggiori does not work for the Swiss franc exchange rates. The price of risk estimates take unrealistic, negative values. One possible explanation is that the approach as it is used by Maggiori suffers from a measurement error for the expected exchange rate which represents a potential source of imprecision. By using the prediction of an augmented Fama regression to measure the expected exchange rate change, this measurement error can be avoided and the safety premium estimates become more realistic and closer to those obtained with a maximum likelihood-estimated GARCH approach. Overall, however, the GARCH approach still seems to be preferable to the instrumental variable approach.

Utjecaj krize na promjene osobne potrošnje pojedinaca: sjećanje na krizu i odluke o potrošnji budućeg dohotka

Utjecaj krize na promjenu i obilježja osobne potrošnje u Republici Hrvatskoj predmet je brojnih istraživanja. Nastupanje krize sagledava se kao nepredviđen šok za potrošača i istražuje se u kojoj mjeri taj šok utječe na odluke vezane uz osobnu potrošnju i trošenje budućeg dohotka. No ostaje pitanje koliko dugo traje sjećanje na krizu i koliko vremena nakon završetka ili smanjenja intenziteta djelovanja krize, kriza i dalje utječe na odluke o potrošnji pojedinaca. U ovome radu anketnim istraživanjem 521 ispitanika istražuje se utječe li i dalje šok izazvan promjenama tečaja švicarskog franka na trenutačne kao i na odluke o potrošnji budućeg dohotka putem uzimanja kredita. Očekuju li pojedinci mogućnost ponovne pojave značajnih promjena tečaja i kamatne stope te donose li odluke o potrošnji budućeg dohotka u svjetlu tih očekivanja? Kako bi se ispitalo kako šok nastao promjenama tečaja švicarskog franka utječe na promjenu stava o kreditnom zaduživanju primijenjena je binarna logistička regresija. Rezultati pokazuju da je prirodni logaritam šanse da je na pojedinca šok imao utjecaja na stav o kreditnom zaduživanju pozitivno povezan s doživljajem šoka (p < 0,001) i negativno povezan s trenutačnom zaduženošću (p < 0,001).

Financial Markets' Views about the Euro–Swiss Franc Floor

Exchange rates and option prices incorporate market participants' views about the credibility and the effects of exchange rate targets. I present a model to determine exchange rates under policy targets that can be used to price options. The model is estimated with Euro–Swiss Franc exchange rate and options price data. In the first few months of the minimum exchange rate policy, the implied survival probability of the policy for a 3‐month horizon was typically less than 75%. Over time, the credibility increased and this probability reached 95% in August 2014.

Appreciation Pressures and Real Depreciation: The Experience with the Swiss Franc-Euro Exchange Rate Floor

<p>We study the course of the Swiss price level during the recent episode where Switzerland enforced a floor on the Swiss Franc exchange rate relative to the Euro. Given the strong nominal upward pressure on the Swiss currency the introduced limit of 1.20 Francs per Euro led to a quasi-fixed exchange rate from 2011 until early 2015. This measure was specifically aimed at helping the firms of the Swiss export sector to compete internationally. A further reason for imposing this floor was the Swiss National Bank’s concern with deflationary pressures. Interestingly, it turned out that during the episode with a quasi-fixed exchange rate the Swiss price level came under downward pressure. We offer an analysis that helps to understand this depreciation of the Swiss currency in real terms which in fact contributed to the exchange rate floor being eventually abandoned. The article thus clarifies some intricate mechanisms affecting the choice of exchange rate policies which are so important for firms in the export sector. As a theoretical contribution (complementing the well-known Balassa-Samuelson analysis) the article presents a computable equilibrium model that explains real exchange rate variations with diverging trends in the productivity growth of the non-traded goods sectors of economies.</p>

Swiss franc's one-sided target zone during 2011–2015

On 6 September 2011, a ceiling on the value of the Swiss franc was imposed, at CHF 1.2 per euro. With the continuous weakness of the euro area economy, this exchange rate limit was abandoned on 15 January 2015. This paper proposes a quasi-bounded process for the Swiss franc exchange rate dynamics under a one-sided target zone during this period, in which the exchange rate can breach the strong-side limit under a restricted condition of the relationship between the parameters of the drift term and stochastic part of the process. The empirical results using market data during 6 September 2011–14 January 2015 with a rolling one-year window suggest that this model can describe the dynamics of the Swiss franc under a one-sided target zone, where the drifting force is an increasing function of foreign reserves. While the exchange rate was bounded below the strong-side limit during most of the time, as indicated by its dynamics, the condition for breaching the limit was met in November 2014 using only information until that point, i.e., about two months before abandoning the limit.

Firm-level effects of asymmetric intervention in foreign exchange markets: Evidence from the Swiss currency floor

In January 2015, the Swiss National Bank (SNB) abandoned the Swiss franc's exchange rate floor against the Euro. This paper is the first to study the firm-level effects of this asymmetric type of central bank intervention in foreign exchange markets. Using weekly stock returns for a sample of Swiss non-financial firms, I find significant reductions in total stock return volatility as well as market risk following the introduction of the currency floor. Accounting for the asymmetric nature of the intervention, I show that the enforcement of this policy solely manifests in a significant reduction of incremental EUR/CHF exchange rate risk exposures of exporting firms, while importing firms experience reductions in proportion to the market portfolio only. Thus, the asymmetric policy design is reflected in asymmetric responses of firm-level currency exposures. All effects, however, do not depend on the extent of business activity in the Eurozone. The overall results suggest that the currency floor was successful in supporting the performance of the Swiss economy by effectively reducing stock return sensitivities to market fluctuations and EUR/CHF exchange rate volatility.

A Quasi-Bounded Model for Swiss Franc's One-Sided Target Zone During 2011-2015

On 6 September 2011, a ceiling on the value of the Swiss franc was imposed, at CHF 1.2 per euro. With the continuous weakness of the euro area economy, this exchange rate limit was abandoned on 15 January 2015. This paper proposes a quasi-bounded process for the Swiss franc exchange rate dynamics under a one-sided target zone during this period, in which the exchange rate can breach the strong-side limit under a restricted condition of the relationship between the parameters of the drift term and stochastic part of the process. The empirical results using market data during 6 September 2011-14 January 2015 with a rolling one-year window suggest that this model can describe the dynamics of the Swiss franc under a one-sided target zone, where the drifting force is an increasing function of foreign reserves. While the exchange rate was bounded below the strong-side limit during most of the time, as indicated by its dynamics, the condition for breaching the limit was met in November 2014 using only information until that point, i.e., about two months before abandoning the limit.

Firm-Level Effects of Asymmetric Intervention in Foreign Exchange Markets: Evidence from the Swiss Currency Floor

In January 2015, the Swiss National Bank (SNB) abandoned the Swiss franc's exchange rate floor against the Euro. This paper is the first to study the firm-level effects of this asymmetric type of central bank intervention in foreign exchange markets. Using weekly stock returns for a sample of Swiss non-financial firms, I find significant reductions in total stock return volatility as well as market risk following the introduction of the currency floor. Accounting for the asymmetric nature of the intervention, I show that the enforcement of this policy solely manifests in a significant reduction of incremental EUR/CHF exchange rate risk exposures of exporting firms, while importing firms experience reductions in proportion to the market portfolio only. Thus, the asymmetric policy design is reflected in asymmetric responses of firm-level currency exposures. All effects, however, do not depend on the extent of business activity in the Eurozone. The overall results suggest that the currency floor was successful in supporting the performance of the Swiss economy by effectively reducing stock return sensitivities to market fluctuations and EUR/CHF exchange rate volatility.

On financial risk and the safe haven characteristics of Swiss franc exchange rates

Abstract We analyse bilateral Swiss franc exchange rate returns in an asset pricing framework to evaluate the Swiss franc's safe haven characteristics. A “safe haven” currency is a currency that offers hedging value against global risk, both on average and in particular in crisis episodes. To explore these issues we estimate the relationship between exchange rate returns and risk factors in augmented UIP regressions, using recently developed econometric methods to account for the possibility that the regression coefficients may be changing over time. Our results highlight that in response to increases in global risk the Swiss franc appreciates against typical carry trade investment currencies such as the Australian dollar, but depreciates against the US dollar, the Yen and the British pound. Thus, the Swiss franc exhibits safehaven characteristics against many, but not all other currencies. We find statistically significant time variation in the relationship between Swiss franc returns and risk factors, with this link becoming stronger in times of stress.

The Euro Crisis and Contagion among Central and Eastern European Currencies: Recommendations for Avoiding Lending in a Safe Haven Currency such as CHF

This study analyses the Czech, Hungarian, and Polish currencies by examining the statistical characteristics of the Swiss franc as well as the ECB monetary policy in order to indicate shocks in these markets between 2002 and 2013. The abundance of monetary easing decisions can be used as a viable sign of market misbehaviour in addition to the low probability of extreme exchange rate fluctuations. Indeed, the temporal distribution of extreme currency fluctuations provides vital information about the nature of the recent crisis. Contagions can be defined as increased correlations during periods of crisis, while divergence means a significant decrease in this regard. Methodologically, common movements in this study were calculated by using DCC-GARCH modelling. The findings of this study underline the special features of the Swiss franc exchange rate, notably that its extreme fluctuations can be managed by using swap agreements and that it tended towards divergences during the crisis era. These results support the idea of avoiding lending in reserve currencies.

Inflationary or Deflationary Consequences of an Exchange Rate Floor

We study the course of the Swiss price level during the recent episode where Switzerland enforced a floor on the Swiss Franc exchange rate relative to the Euro. Given the strong nominal upward pressure on the Swiss currency the introduced limit of 1.20 Francs per Euro led to a quasi-fixed exchange rate from 2011 until early 2015. This measure was specifically aimed at helping the firms of the Swiss export sector to compete internationally. A further reason for imposing this floor was the Swiss National Bank’s concern with deflationary pressures. Interestingly, it turned out that during the episode with a quasi-fixed exchange rate the Swiss price level came under downward pressure. We offer an analysis that helps to understand this depreciation of the Swiss currency in real terms which in fact contributed to the exchange rate floor being eventually abandoned. The article thus clarifies some intricate mechanisms affecting the choice of exchange rate policies which are so important for firms in the export sector. As a theoretical contribution (complementing the well-known Balassa-Samuelson analysis) the article presents a computable equilibrium model that explains real exchange rate variations with diverging trends in the productivity growth of the non-traded goods sectors of economies.

Yen-synchronization of floating East Asian currencies: A regime-switching regression model and micro-structural analysis

Using a regime-switching regression model, we find evidence of synchronization between the Swiss-franc exchange rates of floating East Asian currencies and the Swiss-franc–Japanese-yen exchange rate over the period 1999–2006. The volatility of Swiss-franc–East-Asian currencies’ exchange rates is higher during the synchronization period than during the de-synchronization period. Contrary to traditional arguments concerning the yen-bloc, we find that the Export-Similarity Index and Foreign Portfolio Investment between Japan and East Asian countries are the two main determinants of yen-synchronization in the region. Finally, micro-structural analysis shows that the weeks of synchronization is greater when the yen is strong for Korea and Taiwan, but there are no asymmetric responses for Thailand, Indonesia, or the Philippines.

The Swiss Franc exchange rate and deviations from uncovered interest parity: Global vs domestic factors

Summary 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.

Discussion of “The Swiss Franc Exchange Rate and Deviations from UIP: Global versus Domestic Factors” by Mathias Hoffmann and Rahel Suter

Discussion of “The Swiss Franc Exchange Rate and Deviations from UIP: Global versus Domestic Factors” by Mathias Hoffmann and Rahel Suter