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

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  • Christian Grisse
  • Thomas Nitschka

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 the euro as well as 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 safe-haven 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.

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Bibliographic Info

Paper provided by Swiss National Bank in its series Working Papers with number 2013-04.

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Length: 35 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:snb:snbwpa:2013-04

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Keywords: Exchange rate; monetary policy; risk factors; safe haven; Swiss franc; uncovered interest rate parity;

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References

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  1. Farhi, Emmanuel & Fraiberger, Samuel P. & Gabaix, Xavier & Rancière, Romain & Verdelhan, Adrien, 2009. "Crash Risk in Currency Markets," CEPR Discussion Papers 7322, C.E.P.R. Discussion Papers.
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  6. Menkhoff, Lukas & Sarno, Lucio & Schmeling, Maik & Schrimpf, Andreas, 2011. "Carry Trades and Global Foreign Exchange Volatility," CEPR Discussion Papers 8291, C.E.P.R. Discussion Papers.
  7. Markus K. Brunnermeier & Stefan Nagel & Lasse H. Pedersen, 2009. "Carry Trades and Currency Crashes," NBER Chapters, in: NBER Macroeconomics Annual 2008, Volume 23, pages 313-347 National Bureau of Economic Research, Inc.
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Cited by:
  1. Reinout De Bock & Irineu E. Carvalho Filho, 2013. "The Behavior of Currencies during Risk-off Episodes," IMF Working Papers 13/8, International Monetary Fund.
  2. Victoria Galsband & Thomas Nitschka, 2013. "Currency excess returns and global downside market risk," Working Papers 2013-07, Swiss National Bank.
  3. Thomas Nitschka, 2014. "The Good? The Bad? The Ugly? Which news drive (co)variation in Swiss and US bond and stock excess returns?," Working Papers 2014-01, Swiss National Bank.

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