IDEAS home Printed from https://ideas.repec.org/a/kap/openec/v27y2016i2d10.1007_s11079-015-9376-6.html
   My bibliography  Save this article

Exchange Rate Returns and External Adjustment: Evidence from Switzerland

Author

Listed:
  • Christian Grisse

    (Swiss National Bank)

  • Thomas Nitschka

    (Swiss National Bank)

Abstract

This paper studies the predictive power of external imbalances for exchange rate returns. We focus on Switzerland, a very open economy where exchange rate movements have a strong effect on external imbalances through valuation effects and trade flows. Using a simple modification of the Gourinchas and Rey (J Polit Econ 115(4):665–703, 2007) approach to make their approximation applicable to Switzerland, we find that measures of deviations from trends in Swiss net foreign assets and net exports help to forecast Swiss franc nominal effective exchange rate movements, both in and out of sample.

Suggested Citation

  • Christian Grisse & Thomas Nitschka, 2016. "Exchange Rate Returns and External Adjustment: Evidence from Switzerland," Open Economies Review, Springer, vol. 27(2), pages 317-339, April.
    • Handle: RePEc:kap:openec:v:27:y:2016:i:2:d:10.1007_s11079-015-9376-6
    DOI: 10.1007/s11079-015-9376-6
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11079-015-9376-6
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11079-015-9376-6?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Michael Pippenger & Gregory Goering, 1998. "Exchange Rate Forecasting: Results from a Threshold Autoregressive Model," Open Economies Review, Springer, vol. 9(2), pages 157-170, April.
    2. Ron Alquist & Menzie D. Chinn, 2008. "Conventional and unconventional approaches to exchange rate modelling and assessment," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(1), pages 2-13.
    3. Philip R. Lane & Jay C. Shambaugh, 2010. "Financial Exchange Rates and International Currency Exposures," American Economic Review, American Economic Association, vol. 100(1), pages 518-540, March.
    4. Pierre-Olivier Gourinchas & Hélène Rey, 2007. "International Financial Adjustment," Journal of Political Economy, University of Chicago Press, vol. 115(4), pages 665-703, August.
    5. Linda S. Goldberg & Michael W. Klein, 2011. "Evolving Perceptions of Central Bank Credibility: The European Central Bank Experience," NBER International Seminar on Macroeconomics, University of Chicago Press, vol. 7(1), pages 153-182.
    6. Clark, Todd E. & West, Kenneth D., 2006. "Using out-of-sample mean squared prediction errors to test the martingale difference hypothesis," Journal of Econometrics, Elsevier, vol. 135(1-2), pages 155-186.
    7. Martin Lettau & Sydney Ludvigson, 2001. "Consumption, Aggregate Wealth, and Expected Stock Returns," Journal of Finance, American Finance Association, vol. 56(3), pages 815-849, June.
    8. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2001. "The external wealth of nations: measures of foreign assets and liabilities for industrial and developing countries," Journal of International Economics, Elsevier, vol. 55(2), pages 263-294, December.
    9. Pasquale Della Corte & Steven J. Riddiough & Lucio Sarno, 2016. "Currency Premia and Global Imbalances," The Review of Financial Studies, Society for Financial Studies, vol. 29(8), pages 2161-2193.
    10. Barbara Rossi, 2013. "Exchange Rate Predictability," Journal of Economic Literature, American Economic Association, vol. 51(4), pages 1063-1119, December.
    11. Mr. Martin D Evans, 2012. "International Capital Flows and Debt Dynamics," IMF Working Papers 2012/175, International Monetary Fund.
    12. Graham Elliott & Ulrich K. Muller, 2006. "Efficient Tests for General Persistent Time Variation in Regression Coefficients," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 73(4), pages 907-940.
    13. Martin Evans, 2012. "International Capital Flows and Debt Dynamics," Working Papers gueconwpa~12-12-04, Georgetown University, Department of Economics.
    14. Angelo Ranaldo & Paul Söderlind, 2010. "Safe Haven Currencies," Review of Finance, European Finance Association, vol. 14(3), pages 385-407.
    15. Eleni Iliopulos & Marcus Miller, 2007. "UK External Imbalances and the Sterling: Are they on a Sustainable Path?," Open Economies Review, Springer, vol. 18(5), pages 539-557, November.
    16. Evans, Martin D.D., 2014. "External balances, trade flows and financial conditions," Journal of International Money and Finance, Elsevier, vol. 48(PB), pages 271-290.
    17. Gourinchas, Pierre-Olivier & Rey, Hélène & Truempler, Kai, 2012. "The financial crisis and the geography of wealth transfers," Journal of International Economics, Elsevier, vol. 88(2), pages 266-283.
    18. Pasquale Della Corte & Lucio Sarno & Giulia Sestieri, 2012. "The Predictive Information Content of External Imbalances for Exchange Rate Returns: How Much Is It Worth?," The Review of Economics and Statistics, MIT Press, vol. 94(1), pages 100-115, February.
    19. Nicolas Stoffels & Cédric Tille, 2007. "Why are Switzerland's foreign assets so low? The growing financial exposure of a small open economy," Staff Reports 283, Federal Reserve Bank of New York.
    20. Whelan, Karl, 2008. "Consumption and expected asset returns without assumptions about unobservables," Journal of Monetary Economics, Elsevier, vol. 55(7), pages 1209-1221, October.
    21. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2007. "The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004," Journal of International Economics, Elsevier, vol. 73(2), pages 223-250, November.
    22. Giancarlo Corsetti & Panagiotis T. Konstantinou, 2012. "What Drives US Foreign Borrowing? Evidence on the External Adjustment to Transitory and Permanent Shocks," American Economic Review, American Economic Association, vol. 102(2), pages 1062-1092, April.
    23. John Y. Campbell, Robert J. Shiller, 1988. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," The Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 195-228.
    24. Lane, Philip & Milesi-Ferretti, Gian Maria, "undated". "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics.
    25. Ahmad Baharumshah & Venus Liew, 2006. "Forecasting Performance of Exponential Smooth Transition Autoregressive Exchange Rate Models," Open Economies Review, Springer, vol. 17(2), pages 235-251, April.
    26. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 185-246, National Bureau of Economic Research, Inc.
    27. Grisse, Christian & Nitschka, Thomas, 2015. "On financial risk and the safe haven characteristics of Swiss franc exchange rates," Journal of Empirical Finance, Elsevier, vol. 32(C), pages 153-164.
    28. repec:fth:harver:1435 is not listed on IDEAS
    29. Rich, Georg, 2003. "Swiss monetary policy targeting 1974-1996: the role of internal policy analysis," Working Paper Series 236, European Central Bank.
    30. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Makoto Shimizu, 2020. "The Present-Value Model of the Exchange Rate with a Persistently Time-Varying Risk Premium: Evidence from the Dollar-Yen Rate," Open Economies Review, Springer, vol. 31(5), pages 1037-1059, November.
    2. Agust n S. B n trix & Philip R. Lane, "undated". "Cross-Country Exposures to the Swiss Franc," Trinity Economics Papers tep0116, Trinity College Dublin, Department of Economics.
    3. Agustín S. Bénétrix & Philip R. Lane, "undated". "Cross-Country Exposures to the Swiss Franc," Trinity Economics Papers tep0116, Trinity College Dublin, Department of Economics.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gourinchas, Pierre-Olivier & Rey, Hélène, 2014. "External Adjustment, Global Imbalances, Valuation Effects," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 585-645, Elsevier.
    2. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
    3. Pierre-Olivier Gourinchas & Hélène Rey, 2007. "International Financial Adjustment," Journal of Political Economy, University of Chicago Press, vol. 115(4), pages 665-703, August.
    4. Pablo Pincheira & Jorge Selaive, 2011. "External imbalance, valuation adjustments and real Exchange rate: evidence of predictability in an emerging economy," Revista de Analisis Economico – Economic Analysis Review, Universidad Alberto Hurtado/School of Economics and Business, vol. 26(1), pages 107-125, Junio.
    5. Pierre-Olivier Gourinchas & Hélène Rey & Maxime Sauzet, 2019. "The International Monetary and Financial System," Annual Review of Economics, Annual Reviews, vol. 11(1), pages 859-893, August.
    6. Stijn Claessens & M Ayhan Kose, 2017. "Asset prices and macroeconomic outcomes: a survey," BIS Working Papers 676, Bank for International Settlements.
    7. Opie, Wei & Riddiough, Steven J., 2020. "Global currency hedging with common risk factors," Journal of Financial Economics, Elsevier, vol. 136(3), pages 780-805.
    8. Dahlquist, Magnus & Pénasse, Julien, 2022. "The missing risk premium in exchange rates," Journal of Financial Economics, Elsevier, vol. 143(2), pages 697-715.
    9. Philip Lane, 2013. "Financial Globalisation and the Crisis," Open Economies Review, Springer, vol. 24(3), pages 555-580, July.
    10. Giancarlo Corsetti & Panagiotis T. Konstantinou, 2012. "What Drives US Foreign Borrowing? Evidence on the External Adjustment to Transitory and Permanent Shocks," American Economic Review, American Economic Association, vol. 102(2), pages 1062-1092, April.
    11. Raheem, Ibrahim, 2020. "Global financial cycles and exchange rate forecast: A factor analysis," MPRA Paper 105358, University Library of Munich, Germany.
    12. Hobza, Alexandr & Zeugner, Stefan, 2014. "Current accounts and financial flows in the euro area," Journal of International Money and Finance, Elsevier, vol. 48(PB), pages 291-313.
    13. Lasha Kavtaradze & Manouchehr Mokhtari, 2018. "Factor Models And Time†Varying Parameter Framework For Forecasting Exchange Rates And Inflation: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 32(2), pages 302-334, April.
    14. Feng, Wenjun & Zhang, Zhengjun, 2023. "Currency exchange rate predictability: The new power of Bitcoin prices," Journal of International Money and Finance, Elsevier, vol. 132(C).
    15. Ghironi, Fabio & Lee, Jaewoo & Rebucci, Alessandro, 2015. "The valuation channel of external adjustment," Journal of International Money and Finance, Elsevier, vol. 57(C), pages 86-114.
    16. Kristin Forbes & Ida Hjortsoe & Tsvetelina Nenova, 2017. "Current Account Deficits During Heightened Risk: Menacing or Mitigating?," Economic Journal, Royal Economic Society, vol. 0(601), pages 571-623, May.
    17. Ali Trabelsi Karoui & Aida Kammoun, 2021. "Exchange Rate Determination: Mixed Microstructural and Macroeconomic Approach," International Journal of Economics and Financial Issues, Econjournals, vol. 11(3), pages 89-106.
    18. Pasquale Della Corte & Lucio Sarno & Giulia Sestieri, 2012. "The Predictive Information Content of External Imbalances for Exchange Rate Returns: How Much Is It Worth?," The Review of Economics and Statistics, MIT Press, vol. 94(1), pages 100-115, February.
    19. Eugeni, Sara, 2024. "Nominal exchange rates and net foreign assets' dynamics: The stabilization role of valuation effects," Journal of International Money and Finance, Elsevier, vol. 141(C).
    20. Devereux, Michael B. & Saito, Makoto & Yu, Changhua, 2020. "International capital flows, portfolio composition, and the stability of external imbalances," Journal of International Economics, Elsevier, vol. 127(C).

    More about this item

    Keywords

    External imbalances; External adjustment; Exchange rates; Swiss franc;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:openec:v:27:y:2016:i:2:d:10.1007_s11079-015-9376-6. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.