On the Credibility of the Euro/Swiss Franc Floor: A Financial Market Perspective

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThe sheer existence of EUR/CHF put options with strike prices below the EUR/CHF 1.20 floor, trading at non-zero cost, challenged the full credibility of the Swiss National Bank (SNB) in enforcing the lower barrier implemented in September 6, 2011 and abandoned on January 15, 2015. We estimate the risk-neutral break probabilities of a realignment of the floor from market prices of put options, using an extension of the Veestraeten option pricing model which assumes that the underlying security price exhibits a lower barrier. We estimate probabilities considerably different from zero, even when the exchange rate traded far above the EUR/CHF 1.20 floor. We observe a drastic increase in the break-probabilities after August 2014, reaching a level of nearly 50%. The credibility of the SNB in maintaining the floor, as seen from the option market, was thus substantially lower than publicly claimed.

Who put the Holes in the Swiss Cheese? Currency Crisis Under Appreciation Pressure

“…In contrast to this, Hertrich & Zimmermann (2015) emphasize that credibility of the SNB in maintaining the peg was substantially lower than publicly claimed. They use EUR/CHF put options with strike prices below 1.20 EUR/CHF to estimate break-probabilities.…”

Measuring Exchange Rate, Price, and Output Dynamics at the Effective Lower Bound

“…12 With hindsight, the increase in sight deposits by CHF 42 billion was not only temporary but also modest compared to the CHF 170 billion expansion that followed in August 2011 and the CHF 391 billion expansion of sight deposits between August 2011 and May 2016. 13 For studies analysing the credibility of the minimum exchange rate during this period Hertrich and Zimmermann (2017), Jermann (2017), and Mirkov, Pozdeev and Soderlind (2016). For our empirical analysis, it matters only, however, that the minimum exchange rate was enforced and that the removal of the exchange rate was not anticipated.…”

“… For studies analysing the credibility of the minimum exchange rate during this period Hertrich and Zimmermann (), Jermann (), and Mirkov, Pozdeev and Soderlind (). For our empirical analysis, it matters only, however, that the minimum exchange rate was enforced and that the removal of the exchange rate was not anticipated. …”

Event-Related Exchange Rate Forecasts Combining Information from Betting Quotes and Option Prices

“…From the very beginning, it was clear that this measure would be temporary, but similar to the situation analyzed by Malz (1996), the date of the revocation of this policy was not known to the market. A number of papers (Hanke, Poulsen, and Weissensteiner (2015), Hanke, Poulsen, and Weissensteiner (2016), Hertrich andZimmermann (2017), Jermann (2017), Mirkov, Pozdeev, and Söderlind (2016)) analyze various aspects of the EURCHF exchange rate development during this period. In particular, the question where the exchange rate would have been without the SNB's minimum exchange rate policy is closely related to the topic of the present paper, because it can be framed as forecasting the new level of the exchange rate after a revocation of this policy.…”