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Global risk sentiment and the Swiss franc: A time-varying daily factor decomposition model

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  • Fink, Fabian
  • Frei, Lukas
  • Gloede, Oliver

Abstract

This paper develops an FX factor model to decompose short-term bilateral exchange rate dynamics into different global factors and local uniqueness. We apply the model to the Swiss franc exchange rates against the US dollar (USDCHF) and the euro (EURCHF) between 2006 and 2018 and decompose daily dynamics into three global factors: risk, US dollar, and euro. The model captures daily dynamics well, explaining approximately 73% of the variation in USDCHF and 37% of the variation in EURCHF, reflecting the importance of global factors for Swiss franc exchanges rates. The risk factor contributes the most to Swiss franc dynamics, especially in times of a worsening risk environment, highlighting the role of the Swiss franc as a safe-haven currency. Global factors had been almost completely reflected in USDCHF dynamics before the euro area debt crisis, but once that crisis began, they also became important for EURCHF. In a case study of the introduction of the EURCHF minimum exchange rate we showcase the importance of momentum in daily Swiss franc returns.

Suggested Citation

  • Fink, Fabian & Frei, Lukas & Gloede, Oliver, 2022. "Global risk sentiment and the Swiss franc: A time-varying daily factor decomposition model," Journal of International Money and Finance, Elsevier, vol. 122(C).
    • Handle: RePEc:eee:jimfin:v:122:y:2022:i:c:s026156062100190x
    DOI: 10.1016/j.jimonfin.2021.102539
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    1. Marco Tronzano, 2022. "Optimal Portfolio Allocation between Global Stock Indexes and Safe Haven Assets: Gold versus the Swiss Franc (1999–2021)," JRFM, MDPI, vol. 15(6), pages 1-24, May.

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    More about this item

    Keywords

    Foreign exchange; Factor model; Variance decomposition; Safe-haven; Carry trade; Momentum;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis

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