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The Swiss Franc Exchange Rate and Deviations from Uncovered Interest Parity: Global vs Domestic Factors

Author

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  • Mathias Hoffmann
  • Rahel Suter

Abstract

We 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.

Suggested Citation

  • Mathias Hoffmann & Rahel Suter, 2010. "The Swiss Franc Exchange Rate and Deviations from Uncovered Interest Parity: Global vs Domestic Factors," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 146(I), pages 349-371, March.
  • Handle: RePEc:ses:arsjes:2010-i-15
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    References listed on IDEAS

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    1. Peter Kugler & Beatrice Weder, 2004. "International Portfolio Holdings and Swiss Franc Asset Returns," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 140(III), pages 301-325, September.
    2. Carlos Lenz & Marcel Savioz, 2009. "Monetary determinants of the Swiss franc," Working Papers 2009-16, Swiss National Bank.
    3. Hanno Lustig & Adrien Verdelhan, 2007. "The Cross Section of Foreign Currency Risk Premia and Consumption Growth Risk," American Economic Review, American Economic Association, vol. 97(1), pages 89-117, March.
    4. Backus, David K. & Smith, Gregor W., 1993. "Consumption and real exchange rates in dynamic economies with non-traded goods," Journal of International Economics, Elsevier, vol. 35(3-4), pages 297-316, November.
    5. Kugler, Peter & Weder, Beatrice, 2005. "Why are Returns on Swiss Franc Asset so Low?," Working papers 2005/08, Faculty of Business and Economics - University of Basel.
    6. Engel, Charles, 1996. "The forward discount anomaly and the risk premium: A survey of recent evidence," Journal of Empirical Finance, Elsevier, vol. 3(2), pages 123-192, June.
    7. Peter Kugler & Beatrice Weder, 2004. "International Portfolio Holdings and Swiss Franc Asset Returns," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 140(III), pages 301-325, September.
    8. Kugler, Peter & Weder di Mauro, Beatrice, 2005. "Why Are Returns on Swiss Franc Assets So Low? Rare Events May Solve the Puzzle," CEPR Discussion Papers 5181, C.E.P.R. Discussion Papers.
    9. Peter Kugler & Beatrice Weder, 2002. "The Puzzle of the Swiss Interest Rate Island: Stylized Facts and a New Interpretation," Aussenwirtschaft, University of St. Gallen, School of Economics and Political Science, Swiss Institute for International Economics and Applied Economics Research, vol. 57(01), pages 49-64, March.
    10. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
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    Citations

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    Cited by:

    1. 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.
    2. Thomas Nitschka, 2014. "What News Drive Variation in Swiss and US Bond and Stock Excess Returns?," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 150(II), pages 89-118, June.
    3. Thomas Nitschka, 2014. "Have investors been looking for exposure to specific countries since the global financial crisis? - Insights from the Swiss franc bond market," Working Papers 2014-13, Swiss National Bank.
    4. Lars P. Feld & Ekkehard A. Köhler, 2015. "Is Switzerland an Interest Rate Island after all? Time Series and Non-Linear Switching Regime Evidence," CESifo Working Paper Series 5628, CESifo Group Munich.
    5. repec:eee:glofin:v:35:y:2018:i:c:p:82-96 is not listed on IDEAS
    6. Thomas Nitschka, 2016. "Risk premia on Swiss government bonds and sectoral stock indexes during international crises:," Aussenwirtschaft, University of St. Gallen, School of Economics and Political Science, Swiss Institute for International Economics and Applied Economics Research, vol. 67(02), pages 51-67, August.
    7. Virginie Coudert & Cyriac Guillaumin & Hélene Raymond, 2014. "Looking at the Other Side of Carry Trades: Are there any Safe Haven Currencies?," Working Papers 2014-03, CEPII research center.
    8. Alexandra Janssen & Rahel Studer, 2014. "The Swiss franc's honeymoon," ECON - Working Papers 170, Department of Economics - University of Zurich, revised Jan 2017.
    9. Pınar Yeşin, 2017. "Capital Flows and the Swiss Franc," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 153(4), pages 403-436, October.
    10. Grisse, Christian & Nitschka, Thomas, 2015. "On financial risk and the safe haven characteristics of Swiss franc exchange rates," Journal of Empirical Finance, Elsevier, vol. 32(C), pages 153-164.
    11. Irineu Carvalho Filho, 2015. "Risk-Off Episodes and Swiss Franc Appreciation: The Role of Capital Flows," German Economic Review, Verein für Socialpolitik, vol. 16(4), pages 439-463, November.
    12. Kevin Ross & Tommaso Mancini Griffoli, 2010. "Discussion: The Swiss Franc Exchange Rate and Deviations from Uncovered Interest Parity: Global vs Domestic Factors," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 146(I), pages 373-384, March.
    13. repec:spr:sjecst:v:154:y:2018:i:1:d:10.1186_s41937-017-0014-7 is not listed on IDEAS

    More about this item

    Keywords

    Currency risk; exchange rate; save haven effects; uncovered interest parity (UIP);

    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; Trading Volume; Bond Interest Rates

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