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International Portfolio Holdings and Swiss Franc Asset Returns

  • Kugler, Peter
  • Weder di Mauro, Beatrice

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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4467.

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Date of creation: Jul 2004
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Handle: RePEc:cpr:ceprdp:4467
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  1. 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.
  2. Cumby, Robert E & Obstfeld, Maurice, 1981. "A Note on Exchange-Rate Expectations and Nominal Interest Differentials: A Test of the Fisher Hypothesis," Journal of Finance, American Finance Association, vol. 36(3), pages 697-703, June.
  3. 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.
  4. Mario Forni & Marc Hallin & Lucrezia Reichlin & Marco Lippi, 2000. "The generalised dynamic factor model: identification and estimation," ULB Institutional Repository 2013/10143, ULB -- Universite Libre de Bruxelles.
  5. Frederic S. Mishkin, 1982. "Are Real Interest Rates Equal Across Countries? An Empirical Investigation of International Parity Conditions," NBER Working Papers 1048, National Bureau of Economic Research, Inc.
  6. Forni, Mario & Lippi, Marco, 2000. "The Generalized Dynamic Factor Model: Representation Theory," CEPR Discussion Papers 2509, C.E.P.R. Discussion Papers.
  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. Modjtahedi, Bagher, 1988. "Dynamics of real interest differentials : An empirical investigation," European Economic Review, Elsevier, vol. 32(6), pages 1191-1211, July.
  9. Peter KUGLER & Klaus NEUSSER, 1990. "International Real Interest Rate Equalization: A Multivariate Time Series Approach," Vienna Economics Papers vie9003, University of Vienna, Department of Economics.
  10. Chamberlain, Gary & Rothschild, Michael, 1982. "Arbitrage, Factor Structure, and Mean-Variance Analysis on Large Asset Markets," Scholarly Articles 3230355, Harvard University Department of Economics.
  11. Kugler, Peter & Weder, Beatrice, 2002. "The puzzle of the Swiss interest rate island : stylized facts and a new interpretation," HWWA Discussion Papers 168, Hamburg Institute of International Economics (HWWA).
  12. 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.
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