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International Portfolio Holdings and Swiss Franc Asset Returns

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  • Peter Kugler

    ()

  • Beatrice Weder

    (University of Basel)

Abstract

This Paper revisits the puzzle of low returns on Swiss franc assets using a new dataset of international portfolio holdings at Swiss banks. The main findings are as follows. First, we find that the return anomaly is present only for fixed income assets and not for equity. Second, it is mostly due to a long run deviation from uncovered interest rate parity, not a deviation from purchasing power parity. Third, it is unlikely that foreign demand for Swiss assets (possibly due to banking secrecy) is driving down returns: this demand is quantitatively small especially for Swiss franc fixed income instruments. A dynamic factor analysis confirms that foreign demand had almost no impact on Swiss franc asset prices. Finally, we propose a new explanation for low returns on Swiss fixed income assets, namely the diversification benefits offered by these instruments. Applying reversed portfolio optimization to back out the implied returns reveals that the estimated pattern of this returns conforms very well to the observed pattern.

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Bibliographic Info

Paper provided by Faculty of Business and Economics - University of Basel in its series Working papers with number 2004/08.

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Date of creation: 2004
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Handle: RePEc:bsl:wpaper:2004/08

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Related research

Keywords: Portfolio Choice; Asset Returns; Switzerland;

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References

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  1. Gary Chamberlain & Michael Rothschild, 1982. "Arbitrage, Factor Structure, and Mean-Variance Analysis on Large Asset Markets," NBER Working Papers 0996, National Bureau of Economic Research, Inc.
  2. Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 1999. "The Generalized Dynamic Factor Model: Identification and Estimation," CEPR Discussion Papers 2338, C.E.P.R. Discussion Papers.
  3. Modjtahedi, Bagher, 1988. "Dynamics of real interest differentials : An empirical investigation," European Economic Review, Elsevier, vol. 32(6), pages 1191-1211, July.
  4. Stock, James H & Watson, Mark W, 2002. "Macroeconomic Forecasting Using Diffusion Indexes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 147-62, April.
  5. Stilianos Fountas & Jyh-lin Wu, 1998. "Testing for Real Interest Rate Convergence in European Countries," Working Papers 24, National University of Ireland Galway, Department of Economics, revised 1998.
  6. Mishkin, Frederic S, 1984. " Are Real Interest Rates Equal across Countries? An Empirical Investigation of International Parity Conditions," Journal of Finance, American Finance Association, vol. 39(5), pages 1345-57, December.
  7. Christian Dreger & Christian Schumacher, 2003. "Are Real Interest Rates Cointegrated? Further evidence based on paneleconometric methods," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 139(I), pages 41-53, March.
  8. Kugler, Peter & Neusser, K, 1993. "International Real Interest Rate Equalization: A Multivariate Time-Series Approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(2), pages 163-74, April-Jun.
  9. Dutton, Marilyn Miller, 1993. "Real interest rate parity new measures and tests," Journal of International Money and Finance, Elsevier, vol. 12(1), pages 62-77, February.
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Citations

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Cited by:
  1. Christoph Sax, 2006. "Interest Rates and Exchange Rate Movements: Analyzing Short-term Investments in Long-term Bonds," Financial Markets and Portfolio Management, Springer, vol. 20(2), pages 205-220, June.
  2. Angelo Ranaldo & Paul Söderlind, 2010. "Safe Haven Currencies," Review of Finance, European Finance Association, vol. 14(3), pages 385-407.
  3. Peter Kugler, 2010. "Grosse Währung eines kleinen Landes: Der Schweizer Franken 1850 bis ?," Working papers 2010/11, Faculty of Business and Economics - University of Basel.
  4. Weder, Beatrice & Weder, Rolf, 2009. "Switzerland.s Rise to a Wealthy Nation: Competition and Contestability as Key Success Factors," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  5. Ricardo Hausmann and Federico Sturzenegger, 2006. "Global imbalances or bad accounting? The missing dark matter in the wealth of nations," Business School Working Papers globalimbal, Universidad Torcuato Di Tella.
  6. Nicolas Stoffels & Cédric Tille, 2007. "Why are Switzerland's foreign assets so low? The growing financial exposure of a small open economy," Staff Reports 283, Federal Reserve Bank of New York.

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