Skip to main content
Swiss Journal of Economics and Statistics
Download PDF

The Swiss Franc exchange rate and deviations from uncovered interest parity: Global vs domestic factors

Swiss Journal of Economics and Statistics volume 146, pages 349–371 (2010)Cite this article

Summary

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.

References

  • Backus, David K., and Gregor W. Smith (1993), “Consumption and Real Exchange Rates in Dynamic Exchange Economies with Nontraded Goods”, Journal of International Economics, 35(3–4), pp. 297–316.

    Article  Google Scholar 

  • Engel, Charles M. (1996), “The Forward Discount Anomaly and the Risk Premium: A Survey of Recent Evidence”, Journal of Empirical Finance, 3, pp. 123–192.

    Article  Google Scholar 

  • Kugler, Peter, and Beatrice Werder (2002), “The Puzzle of the Swiss Interest Island: ‘Stylized Facts and a New Interpretation’”, Aussenwirtschaft, 57, pp. 49–63.

    Google Scholar 

  • Kugler, Peter, and Beatrice Werder (2004), “International Portfolio Holdings and Swiss Franc Returns”, Schweizerische Zeitschrift für Volkswirtschaft und Statistik, 140, pp. 301–325.

    Google Scholar 

  • Kugler, Peter, and Beatrice Werder (2005), “Why are Returns on Swiss Franc Asset so Low?”, Applied Economics Quarterly, 51(3), pp. 231–246.

    Google Scholar 

  • Kugler, Peter, and Beatrice Werder (2009), “The Demise of the Swiss Interest Rate Puzzle”, SNB–IMF Conference on Exchange Rates.

  • Lenz, Carlos, and Marcel Savioz (2009), “Monetary Determinants of the Swiss Franc”, paper presented at the annual conference of the Swiss Society of Economics and Statistics, Lausanne 2009.

  • Lustig, Hanno, and Adrien Verdelhan (2007), “The Cross Section of Foreign Currency Risk Premia and Consumption Growth Risk”, American Economic Review, 97 (1), pp. 89–117.

    Article  Google Scholar 

  • Lustig, Hanno, Nick Roussanov and Adrien Verdelhan (2009), “Common Risk Factors in Currency Markets”, Finance International Meeting AFFI– EUROFIDAI, Paris, December 2008. Available at SSRN: http://ssrn.com/abstract=1139447.

  • Newey, Whitney K., and Kenneth D. West (1987), “A Simple, Positive Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix”, Econometrica 55(3), pp. 703–708.

    Article  Google Scholar 

  • Ranaldo, Angelo, and Paul Söderlind (2007), “Safe Haven Currencies”, Swiss National Bank Working Papers, 17.

  • Roth, Jean-Pierre (2008), “The Exchange Rate and Swiss Monetay Policy”, address to the SNB–CEPR conference Foreign Currency Related Risk Taking by Financial Institutions, Firms and Households, Zurich, September 22, 2008.

Download references

Author information

Authors and Affiliations

  1. Institute for Empirical Research in Economics, Chair of International Trade and Finance, University of Zurich, Zuerichbergstrasse 14, CH-8032, Zurich, Switzerland

    Mathias Hoffmann & Rahel Suter

Authors
  1. Mathias Hoffmann
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Rahel Suter
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Mathias Hoffmann.

Additional information

The authors are grateful to comments and discussions obtained during the conference. Special thanks go to Tommaso Mancini Grifolli and Kevin Ross for their insightful and stimulating discussions of the paper.

Rights and permissions

Open Access This article is distributed under the terms of the Creative Commons Attribution 2.0 International License ( https://creativecommons.org/licenses/by/2.0 ), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Reprints and permissions

About this article

Cite this article

Hoffmann, M., Suter, R. The Swiss Franc exchange rate and deviations from uncovered interest parity: Global vs domestic factors. Swiss J Economics Statistics 146, 349–371 (2010). https://doi.org/10.1007/BF03399313

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/BF03399313

JEL-Classification

Keywords