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Peg Abandonment and Cross-Currency Contagion

Author

Listed:
  • Florian Balke

    (Goethe University Frankfurt, 60323 Frankfurt/Main, Germany)

  • Andreas Barth

    (Goethe University Frankfurt, 60323 Frankfurt/Main, Germany; Saarland University Saarbrücken, 66123 Saarbrücken, Germany; Leibniz-Institut für Wirtschaftsforschung Halle, 06108 Halle (Saale), Germany)

  • Arne Reichel

    (Goethe University Frankfurt, 60323 Frankfurt/Main, Germany)

  • Mark Wahrenburg

    (Goethe University Frankfurt, 60323 Frankfurt/Main, Germany;)

Abstract

Using a novel data set comprising bid–ask quotes for foreign exchange swaps from individual dealers, we examine the consequences of the Swiss National Bank’s sudden termination of the Swiss franc/euro minimum exchange rate in 2015 on other pegged currencies. Our findings indicate a spillover effect as dealer banks began to reassess the risk associated with unexpected peg terminations, subsequently leading to wider bid–ask spreads for pegged currencies. This highlights that, even in strong economies, the credibility of a currency peg is influenced not only by the actions of the respective central bank but also by the stability of other pegged currencies.

Suggested Citation

  • Florian Balke & Andreas Barth & Arne Reichel & Mark Wahrenburg, 2024. "Peg Abandonment and Cross-Currency Contagion," Management Science, INFORMS, vol. 70(8), pages 5599-5606, August.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:8:p:5599-5606
    DOI: 10.1287/mnsc.2022.01117
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