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Why Are Returns on Swiss Franc Assets So Low? Rare Events May Solve the Puzzle

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  • Kugler, Peter
  • Weder di Mauro, Beatrice

Abstract

It is well known that the uncovered interest rate parity fails in the short run but usually holds in the long run. This paper analyses the long and short run interest rate parity of 10 major OECD currencies and finds that there is a long run failure of the uncovered interest rate parity condition for the Swiss franc. After correcting for exchange rate changes, mean returns on Swiss assets have been significantly lower than in other currencies, an anomaly not found in any other major currency. The long run return differential has been stable over the last 20 years, transitory structural breaks are only found in times of currency turmoil. We suggest that the return anomaly may be due to an insurance premium against very rare catastrophic events, such as a major war. Supporting evidence for this hypothesis comes from two empirical findings. First, we show that the return differential is negatively affected by large unexpected geo-political events. Second we examine historical data on interest rates differentials and show that the abnormally low level of Swiss returns arises after the First World War only.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5181.

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Date of creation: Aug 2005
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Handle: RePEc:cpr:ceprdp:5181

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Keywords: asset prices; Swiss franc assets; uncovered interest rate parity;

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References

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  1. Kenneth A. Froot, 1990. "Short Rates and Expected Asset Returns," NBER Working Papers 3247, National Bureau of Economic Research, Inc.
  2. Perron, P. & Bai, J., 1995. "Estimating and Testing Linear Models with Multiple Structural Changes," Cahiers de recherche 9552, Universite de Montreal, Departement de sciences economiques.
  3. Philippe Jorion & William N. Goetzmann, 1999. "Global Stock Markets in the Twentieth Century," Journal of Finance, American Finance Association, vol. 54(3), pages 953-980, 06.
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Cited by:
  1. Christopher M. Meissner & Alan M. Taylor, 2006. "Losing our Marbles in the New Century? The Great Rebalancing in Historical Perspective," NBER Working Papers 12580, National Bureau of Economic Research, Inc.
  2. 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.
  3. Hausmann, Ricardo & Sturzenegger, Federico, 2006. "Global Imbalances or Bad Accounting? The Missing Dark Matter in the Wealth of Nations," Working Paper Series rwp06-003, Harvard University, John F. Kennedy School of Government.
  4. Fratzscher, Marcel & Stracca, Livio, 2009. "Does it pay to have the euro? Italy’s politics and financial markets under the lira and the euro," Working Paper Series 1064, European Central Bank.

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