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

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  • Dr. Thomas Nitschka
  • David Haab

Abstract

Swiss 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.
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Suggested Citation

  • Dr. Thomas Nitschka & David Haab, 2018. "Carry trade and forward premium puzzle from the perspective of a safe-haven currency," Working Papers 2018-17, Swiss National Bank.
    • Handle: RePEc:snb:snbwpa:2018-17
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    File URL: https://www.snb.ch/en/publications/research/working-papers/2018/working_paper_2018_17
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    1. Zigraiova, Diana & Havranek, Tomas & Irsova, Zuzana & Novak, Jiri, 2021. "How puzzling is the forward premium puzzle? A meta-analysis," European Economic Review, Elsevier, vol. 134(C).

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    More about this item

    Keywords

    Currency return; exchange rate; forward premium; interest rate differential; UIP;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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