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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.

Suggested Citation

  • 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.
  • Handle: RePEc:cpr:ceprdp:5181
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    References listed on IDEAS

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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. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
    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, June.
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    Citations

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    Cited by:

    1. 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.
    2. Ricardo Hausmann & Federico Sturzenegger, 2006. "Global Imbalances or Bad Accounting? The Missing Dark Matter in the Wealth of Nations," CID Working Papers 124, Center for International Development at Harvard University.
    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. Christopher M. Meissner & Alan M. Taylor, 2006. "Losing our marbles in the new century?: the great rebalancing in historical perspective," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 51.
    5. Ricardo Hausmann & Federico Sturzenegger, 2006. "The Implications of Dark Matter for Assessing the US External Imbalance," CID Working Papers 137, Center for International Development at Harvard University.
    6. 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.
    7. Kleiber Christian & Zeileis Achim, 2013. "Reproducible Econometric Simulations," Journal of Econometric Methods, De Gruyter, vol. 2(1), pages 89-99, July.
    8. Christoph Sax & Rolf Weder, 2009. "How to Explain the High Prices in Switzerland?," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 145(IV), pages 463-483, December.
    9. 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.
    10. Agustín S. Bénétrix & Philip R. Lane, "undated". "Cross-Country Exposures to the Swiss Franc," Trinity Economics Papers tep0116, Trinity College Dublin, Department of Economics.
    11. Pinar Yesin, 2016. "Capital Flows and the Swiss Franc," Working Papers 16.04, Swiss National Bank, Study Center Gerzensee.
    12. Jean-Pierre Danthine, 2017. "Taux négatifs: made for Switzerland," PSE Working Papers halshs-01571650, HAL.
    13. 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.
    14. 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.
    15. 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.

    More about this item

    Keywords

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

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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