Where Would the EUR/CHF Exchange Rate Be Without the SNB's Minimum Exchange Rate Policy?

Hanke, Michael; Poulsen, Rolf; Weissensteiner, Alex

doi:10.2139/ssrn.2368698

Cited by 15 publications

(26 citation statements)

References 10 publications

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“…6 Hence, assuming that the latent exchange rate F t is the equilibrium exchange rate for t ≥ 0 that would prevail without the enforcement of the floor (which accords with the assumption in HANKE, POULSEN, and WEISSENSTEINER (2014), HANKE, POULSEN, and WEISSENSTEINER (2015) and JERMANN (2015)), under the strong-side commitment S t ≥ F t for t ≥ 0, whereby the domestic currency will be either "fairly" priced or undervalued (due to the possibility of interventions by the domestic central bank) with respect to the foreign currency compared to the situation in a freefloating exchange rate regime. Let p(x; k,T), x>0, denote the transition probability density of the RBM process {ln(S t /b)} with the log-moneyness k = ln(S 0 /b).…”

Section: Minimum Exchange Rate Regimementioning

confidence: 74%

“…Since there are no closed-form formulas for non-perpetual American options when it is assumed that the underlying follows a geometric Brownian motion, HANKE, POULSEN, and WEISSENSTEINER (2015) argue that the American put option will never be exercised before maturity, given the fact that both the interest rates in the domestic country they analyze (Switzerland) are close to zero and given that the interest rates in the foreign country (the euro zone) are larger. Consequently, the American put option on the latent exchange rate in HANKE, POULSEN, and WEISSENSTEINER (2015) can be replaced by a European put option P(F t ,T):…”

Section: The Costs Of Implementing a One-sided Target Zonementioning

confidence: 99%

“…Consequently, the American put option on the latent exchange rate in HANKE, POULSEN, and WEISSENSTEINER (2015) can be replaced by a European put option P(F t ,T):…”

Section: The Costs Of Implementing a One-sided Target Zonementioning

confidence: 99%

“…Moreover, in 1978, the SNB already had temporarily implemented a one-sided target zone, when the SNB set a minimum exchange rate vis-à-vis the Deutsche mark (DEM) to impede a strengthening of the Swiss franc (CHF) beyond the level of DEM-CHF 0.80. 2 Recently, a strand of literature has emerged that analyzes the credibility of the Swiss target zone vis-à-vis the euro currency in the aforementioned period of interest (HERTRICH and ZIMMERMANN, 2015) and estimates the latent spot EUR-CHF exchange rate that would have prevailed without the SNB's non-standard exchange rate policy measure (HANKE, POULSEN, and WEISSENSTEINER (2014), HANKE, POULSEN, and WEISSENSTEINER (2015) and JERMANN (2015)). Other studies explore whether the exchange rate target model developed by KRUGMAN (1991) provides a good explanation of the Swiss currency in the period where the EUR-CHF 1.20 exchange rate floor was enforced (STUDER-SUTER and JANSSEN (2014), LERA and SORNETTE (2016) and HERTRICH (2016)).…”

Section: Introductionmentioning

confidence: 99%

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The Costs of Implementing a Unilateral One-Sided Exchange Rate Target Zone

Hertrich¹

2016

Review of Economics

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In the aftermath of the recent financial crisis, the central banks of small open economies such as the Swiss National Bank (SNB) implemented a unilateral one-sided exchange rate target zone vis-à-vis the euro currency to counteract deflationary pressures. Recently, the SNB abandoned its minimum exchange rate regime, arguing that after having analyzed the costs and benefits of this non-standard exchange rate policy measure, it was no longer sustainable. This paper proposes a model that allows central banks and policymakers to estimate ex-ante the costs of implementing and maintaining a unilateral onesided target zone (in terms of the expected size of foreign-exchange interventions) and to monitor these costs during the period in which it is enforced. The model also offers central banks a tool to identify the right timing for the discontinuation of a minimum exchange rate regime. An empirical application to the Swiss case shows the ex-ante estimated size of these costs and reveals that these costs might have been substantial without the abandonment of the minimum exchange rate regime, which accords with the official statements of the SNB.

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Section: Minimum Exchange Rate Regimementioning

confidence: 74%

Section: The Costs Of Implementing a One-sided Target Zonementioning

confidence: 99%

“…Consequently, the American put option on the latent exchange rate in HANKE, POULSEN, and WEISSENSTEINER (2015) can be replaced by a European put option P(F t ,T):…”

Section: The Costs Of Implementing a One-sided Target Zonementioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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The Costs of Implementing a Unilateral One-Sided Exchange Rate Target Zone

Hertrich¹

2016

Review of Economics

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“…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.…”

Section: Relation To the Literature: Event Effects In Exchange Ratmentioning

confidence: 99%

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

2017

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Betting quotes provide valuable information on market-implied probabilities for outcomes of events like elections or referendums, which may have an impact on exchange rates. We generate exchange rate forecasts around such events based on a model that combines risk-neutral event probabilities implied from betting quotes with risk-neutral exchange rate densities extracted from currency option prices. Its application to predict exchange rates around the Brexit referendum and the U.S. presidential elections shows that these forecasts -conditional on the respective outcomes -were accurate, and markets were able to separate their views on the likelihood and the impact of these events. * Hanke (corresponding author), Michael.Hanke@uni.li, University of Liechtenstein, Institute for Finance, 9490 Vaduz, Liechtenstein; Poulsen, rolf@math.ku.dk, University of Copenhagen, Department of Mathematical Sciences, 2100 Copenhagen, Denmark; Weissensteiner, Alex.Weissensteiner@unibz.it, Free University of Bozen-Bolzano, School of Economics and Management, 39100 Bozen, Italy. We thank Jennifer Conrad (the editor) and an anonymous referee for their helpful comments, and we thank Johannes Sivén, who provided part of the data and commented on earlier versions of the paper. Poulsen was partially supported by the research center HIPERFIT funded by contract number 10-092299 from the Danish Strategic Research Council. 1 I IntroductionIn a referendum held on June 23, 2016, 51.9% of the voting population of the United Kingdom voted in favor of leaving the European Union (EU), or Brexit 1 for short. The net economic effects on the United Kingdom caused by this result were predominantly viewed as negative, which explains the weakening of the pound against major world currencies observed in the days and weeks after the referendum. industry, 3 and he would have a wall built along the U.S.-Mexican border. Although observers questioned the credibility of this claim, 4 which was quickly downplayed to "just a fence, not a wall" after the election, 5 remarks like these led many observers to view a 1 Strictly speaking, Brexit is the act or the process of invoking Article 50 in the Lisbon Treaty. When referring specifically to the outcome of the referendum, we will use the terms Leave and Remain.2 See, e.g., articles in the Economist, Feb. 27, 2016, http://tinyurl.com/zs4o84v for a view several months before the referendum, and in The Independent, Aug. 23, 2016, http://tinyurl.com/jyrbwq7for an assessment two months afterwards. Both the Brexit referendum and the U.S. presidential elections are examples of important events with likely consequences on exchange rates. In situations like these, conditional exchange rate forecasts depending on the outcome of the event would be interesting for investors, internationally active companies, central banks, and other financial market participants. In this paper, we present a novel approach to derive such forecasts, which combines data from financial markets with data from betting markets. As a second cont...

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A Cautionary Note on the Put-Call Parity under an Asset Pricing Model with a Lower Reflecting Barrier

Hertrich

2015

Swiss J Economics Statistics

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Where Would the EUR/CHF Exchange Rate Be Without the SNB's Minimum Exchange Rate Policy?

Cited by 15 publications

References 10 publications

The Costs of Implementing a Unilateral One-Sided Exchange Rate Target Zone

The Costs of Implementing a Unilateral One-Sided Exchange Rate Target Zone

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

A Cautionary Note on the Put-Call Parity under an Asset Pricing Model with a Lower Reflecting Barrier

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