The Swiss Franc Exchange Rate and Deviations from Uncovered Interest Parity: Global vs Domestic Factors
AbstractWe 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.
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Bibliographic InfoArticle provided by Swiss Society of Economics and Statistics (SSES) in its journal Swiss Journal of Economics and Statistics.
Volume (Year): 146 (2010)
Issue (Month): I (March)
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Currency risk; exchange rate; save haven effects; uncovered interest parity (UIP);
Find related papers by JEL classification:
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
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- Irineu de Carvalho Filho, 2013. "Risk-off Episodes and Swiss Franc Appreciation: the Role of Capital Flows," Working Papers 13.07, Swiss National Bank, Study Center Gerzensee.
- Christian Grisse & Thomas Nitschka, 2013. "On financial risk and the safe haven characteristics of Swiss franc exchange rates," Working Papers 2013-04, Swiss National Bank.
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