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The Swiss franc's honeymoon


Studer-Suter, Rahel; Janssen, Alexandra (2014). The Swiss franc's honeymoon. Working paper series / Department of Economics 170, University of Zurich.

Abstract

To counter the sharp appreciation of the Swiss franc that set in in the wake of the European sovereign debt crisis, on September 6, 2011, the Swiss National Bank announced to enforce a minimum EUR/CHF exchange rate of CHF 1.20. We find that the simple, though elegant model for the exchange rate within a target zone proposed by Krugman (1991) describes the behavior of the Swiss franc since the inception of this lower bound. Being a prime example of a safe haven currency, the Swiss franc systematically appreciates when global market conditions tighten. But as Krugman's model predicts, the sensitivity of the Swiss franc exchange rate to state variables that indicate such risky times declines as it approaches its lower bound. In particular, the Swiss franc is well described as an S-shaped function of the option prices implied probability for EUR/CHF exchange rate realizations below the lower bound. This state variable not only indicates times of increased global risk, but also quantifies appreciation pressure on the Swiss currency at the lower bound. We conclude that the Swiss franc lower bound helps stabilizing the value of the Swiss currency.

To counter the sharp appreciation of the Swiss franc that set in in the wake of the European sovereign debt crisis, on September 6, 2011, the Swiss National Bank announced to enforce a minimum EUR/CHF exchange rate of CHF 1.20. We find that the simple, though elegant model for the exchange rate within a target zone proposed by Krugman (1991) describes the behavior of the Swiss franc since the inception of this lower bound. Being a prime example of a safe haven currency, the Swiss franc systematically appreciates when global market conditions tighten. But as Krugman's model predicts, the sensitivity of the Swiss franc exchange rate to state variables that indicate such risky times declines as it approaches its lower bound. In particular, the Swiss franc is well described as an S-shaped function of the option prices implied probability for EUR/CHF exchange rate realizations below the lower bound. This state variable not only indicates times of increased global risk, but also quantifies appreciation pressure on the Swiss currency at the lower bound. We conclude that the Swiss franc lower bound helps stabilizing the value of the Swiss currency.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:E52, E58, F31, G01
Uncontrolled Keywords:Exchange rate target zone, safe haven currency, volatility smile
Language:English
Date:August 2014
Deposited On:13 Aug 2014 14:41
Last Modified:05 Apr 2016 18:01
Series Name:Working paper series / Department of Economics
Number of Pages:65
ISSN:1664-7041
Official URL:http://www.econ.uzh.ch/static/wp/econwp170.pdf
Related URLs:http://www.econ.uzh.ch/static/workingpapers.php
Permanent URL: https://doi.org/10.5167/uzh-98146

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