IDEAS home Printed from https://ideas.repec.org/a/wly/jmoncb/v49y2017i2-3p567-578.html
   My bibliography  Save this article

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

Author

Listed:
  • MARKUS HERTRICH
  • HEINZ ZIMMERMANN

Abstract

We estimate the risk‐neutral break probabilities of a realignment of the EUR/CHF 1.20 floor, maintained by the SNB from September 6, 2011, to January 15, 2015, using put options and an option pricing model, which assumes a lower barrier for the exchange rate. We estimate probabilities considerably different from zero, even when the exchange rate traded far above the floor. We observe a drastic increase in the break probabilities up to approximately 50% shortly before the floor was abandoned. From an option market perspective, the credibility of the SNB in maintaining the floor was, thus, substantially lower than publicly claimed.

Suggested Citation

  • Markus Hertrich & Heinz Zimmermann, 2017. "On the Credibility of the Euro/Swiss Franc Floor: A Financial Market Perspective," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(2-3), pages 567-578, March.
    • Handle: RePEc:wly:jmoncb:v:49:y:2017:i:2-3:p:567-578
    DOI: 10.1111/jmcb.12390
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/jmcb.12390
    Download Restriction: no
    File URL: https://libkey.io/10.1111/jmcb.12390?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
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Bakshi, Gurdip & Cao, Charles & Chen, Zhiwu, 1997. "Empirical Performance of Alternative Option Pricing Models," Journal of Finance, American Finance Association, vol. 52(5), pages 2003-2049, December.
    2. Dirk Veestraeten, 2008. "Valuing stock options when prices are subject to a lower boundary," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 28(3), pages 231-247, March.
    3. Hans Gerber & Gérard Pafumi, 2000. "Pricing Dynamic Investment Fund Protection," North American Actuarial Journal, Taylor & Francis Journals, vol. 4(2), pages 28-37.
    4. Michael Hanke & Rolf Poulsen & Alex Weissensteiner, 2015. "Where Would the EUR/CHF Exchange Rate be Without the SNB's Minimum Exchange Rate Policy?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 35(12), pages 1103-1116, December.
    5. Markus Hertrich & Dirk Veestraeten, 2013. "Valuing Stock Options When Prices are Subject to a Lower Boundary: A Correction," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 33(9), pages 889-890, September.
    6. Svensson, Lars E. O., 1992. "The foreign exchange risk premium in a target zone with devaluation risk," Journal of International Economics, Elsevier, vol. 33(1-2), pages 21-40, August.
    7. Dirk Veestraeten, 2013. "Currency option pricing in a credible exchange rate target zone," Applied Financial Economics, Taylor & Francis Journals, vol. 23(11), pages 951-962, June.
    8. Ko, Bangwon & Shiu, Elias S.W. & Wei, Li, 2010. "Pricing maturity guarantee with dynamic withdrawal benefit," Insurance: Mathematics and Economics, Elsevier, vol. 47(2), pages 216-223, October.
    9. Bergman, Yaacov Z., 1996. "Equilibrium asset price ranges," International Review of Financial Analysis, Elsevier, vol. 5(3), pages 161-169.
    10. Frédéric Bossens & Grégory Rayée & Nikos S. Skantzos & Griselda Deelstra, 2010. "Vanna-Volga Methods Applied To Fx Derivatives: From Theory To Market Practice," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 13(08), pages 1293-1324.
    11. Bekaert, Geert & Gray, Stephen F., 1998. "Target zones and exchange rates:: An empirical investigation," Journal of International Economics, Elsevier, vol. 45(1), pages 1-35, June.
    12. Robert Flood & Nancy Marion, 1994. "The Size and Timing of Devaluations in Capital-Controlled Developing Countries," NBER Working Papers 4957, National Bureau of Economic Research, Inc.
    13. Eyal Neuman & Alexander Schied, 2015. "Optimal Portfolio Liquidation in Target Zone Models and Catalytic Superprocesses," Papers 1504.06031, arXiv.org, revised Jul 2015.
    14. De Santis, Giorgio & Gerard, Bruno, 1998. "How big is the premium for currency risk?," Journal of Financial Economics, Elsevier, vol. 49(3), pages 375-412, September.
    15. De Santis, Giorgio & Gerard, Bruno & Hillion, Pierre, 2003. "The relevance of currency risk in the EMU," Journal of Economics and Business, Elsevier, vol. 55(5-6), pages 427-462.
    16. Mr. Peter Breuer, 1999. "Central Bank Participation in Currency Options Markets," IMF Working Papers 1999/140, International Monetary Fund.
    17. Rangvid, Jesper & Sorensen, Carsten, 2001. "Determinants of the implied shadow exchange rates from a target zone," European Economic Review, Elsevier, vol. 45(9), pages 1665-1696, October.
    18. Peter Bernholz, 2015. "The Swiss Experiment: From the Lower Bound to Flexible Exchange Rates," Cato Journal, Cato Journal, Cato Institute, vol. 35(2), pages 403-410, Spring/Su.
    19. Satchell, Stephen, 2007. "Forecasting Expected Returns in the Financial Markets," Elsevier Monographs, Elsevier, edition 1, number 9780750683210.
    20. Zhiguang Wang & Robert T. Daigler, 2011. "The performance of VIX option pricing models: Empirical evidence beyond simulation," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 31(3), pages 251-281, March.
    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. Hui, Cho-Hoi & Lo, Chi-Fai & Fong, Tom Pak-Wing, 2016. "Swiss franc's one-sided target zone during 2011–2015," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 54-67.
    2. Berhold, Kerstin & Stadtmann, Georg, 2017. "Who put the holes in the Swiss cheese? Currency crisis under appreciation pressure," Discussion Papers 391, European University Viadrina Frankfurt (Oder), Department of Business Administration and Economics.
    3. Dean Buckner & Kevin Dowd & Hardy Hulley, 2022. "Arbitrage Problems with Reflected Geometric Brownian Motion," Papers 2201.05312, arXiv.org, revised Sep 2022.
    4. Nikola Mirkov & Igor Pozdeev & Paul Söderlind, 2016. "Toward Removal of the Swiss Franc Cap: Market Expectations and Verbal Interventions," Working Papers 2016-10, Swiss National Bank.
    5. Markus Hertrich, 2022. "Foreign exchange interventions under a minimum exchange rate regime and the Swiss franc," Review of International Economics, Wiley Blackwell, vol. 30(2), pages 450-489, May.
    6. Iain J. Clark & Saeed Amen, 2017. "Implied Distributions from GBPUSD Risk-Reversals and Implication for Brexit Scenarios," Risks, MDPI, vol. 5(3), pages 1-17, July.
    7. Mirkov, Nikola & Pozdeev, Igor & Söderlind, Paul, 2019. "Verbal interventions and exchange rate policies: The case of Swiss franc cap," Journal of International Money and Finance, Elsevier, vol. 93(C), pages 42-54.
    8. Hertrich Markus, 2016. "The Costs of Implementing a Unilateral One-Sided Exchange Rate Target Zone," Review of Economics, De Gruyter, vol. 67(1), pages 91-120, May.
    9. Markus Hertrich, 2015. "A Cautionary Note on the Put-Call Parity under an Asset Pricing Model with a Lower Reflecting Barrier," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 151(III), pages 227-260, September.
    10. Ranaldo, Angelo & de Magistris, Paolo Santucci, 2022. "Liquidity in the global currency market," Journal of Financial Economics, Elsevier, vol. 146(3), pages 859-883.
    11. Breedon, Francis & Chen, Louisa & Ranaldo, Angelo & Vause, Nicholas, 2023. "Judgment day: Algorithmic trading around the Swiss franc cap removal," Journal of International Economics, Elsevier, vol. 140(C).
    12. Michael Funke & Julius Loermann & Richhild Moessner, 2017. "The discontinuation of the EUR/CHF minimum exchange rate in January 2015: was it expected?," BIS Working Papers 652, Bank for International Settlements.
    13. Alex Cukierman, 2019. "Forex Intervention and Reserve Management in Switzerland and Israel since the Financial Crisis: Comparison and Policy Lessons," Open Economies Review, Springer, vol. 30(2), pages 403-424, April.
    14. Yang, Yan-Hong & Shao, Ying-Hui & Shao, Hao-Lin & Stanley, H. Eugene, 2019. "Revisiting the weak-form efficiency of the EUR/CHF exchange rate market: Evidence from episodes of different Swiss franc regimes," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 523(C), pages 734-746.
    15. Gregor Bäurle & Daniel Kaufmann, 2018. "Measuring Exchange Rate, Price, and Output Dynamics at the Effective Lower Bound," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 80(6), pages 1243-1266, December.

    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. Hertrich Markus, 2016. "The Costs of Implementing a Unilateral One-Sided Exchange Rate Target Zone," Review of Economics, De Gruyter, vol. 67(1), pages 91-120, May.
    2. Markus Hertrich, 2015. "A Cautionary Note on the Put-Call Parity under an Asset Pricing Model with a Lower Reflecting Barrier," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 151(III), pages 227-260, September.
    3. Dean Buckner & Kevin Dowd & Hardy Hulley, 2022. "Arbitrage Problems with Reflected Geometric Brownian Motion," Papers 2201.05312, arXiv.org, revised Sep 2022.
    4. Markus Hertrich, 2022. "Foreign exchange interventions under a minimum exchange rate regime and the Swiss franc," Review of International Economics, Wiley Blackwell, vol. 30(2), pages 450-489, May.
    5. R. Guy Thomas, 2023. "Long-term option pricing with a lower reflecting barrier," Papers 2302.05808, arXiv.org.
    6. Peter P. Carr & Zura Kakushadze, 2017. "FX options in target zones," Quantitative Finance, Taylor & Francis Journals, vol. 17(10), pages 1477-1486, October.
    7. Darvas, Zsolt, 1999. "Az árfolyamsávok empirikus modelljei és a devizaárfolyam sávon belüli előrejelezhetetlensége [Empirical models of exchange rate target zones]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(6), pages 507-529.
    8. Jesús Rodríguez López & Hugo Rodríguez Mendizábal, 2003. "How Tight Should Central Bank’s Hands be Tied? Credibility, Volatility and the Optimal Band Width of a Target Zone," Economic Working Papers at Centro de Estudios Andaluces E2003/24, Centro de Estudios Andaluces.
    9. Teulon, Frédéric & Guesmi, Khaled & Mankai, Selim, 2014. "Regional stock market integration in Singapore: A multivariate analysis," Economic Modelling, Elsevier, vol. 43(C), pages 217-224.
    10. Mohamed El Hedi Arouri, 2005. "Intégration financière et diversification internationale des portefeuilles," Économie et Prévision, Programme National Persée, vol. 168(2), pages 115-132.
    11. Jess Rodr?uez L?ez & Hugo Rodr?uez Mendiz?al, 2002. "On the Choice of an Exchange Rate Regime: Target Zones Revisited," UFAE and IAE Working Papers 518.02, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    12. Boubakri, Salem & Guillaumin, Cyriac, 2011. "Financial integration and currency risk premium in CEECs: Evidence from the ICAPM," Emerging Markets Review, Elsevier, vol. 12(4), pages 460-484.
    13. Mencía, Javier & Sentana, Enrique, 2013. "Valuation of VIX derivatives," Journal of Financial Economics, Elsevier, vol. 108(2), pages 367-391.
    14. Abid, Ilyes & Kaabia, Olfa & Guesmi, Khaled, 2014. "Stock market integration and risk premium: Empirical evidence for emerging economies of South Asia," Economic Modelling, Elsevier, vol. 37(C), pages 408-416.
    15. Jesús Rodríguez López & Hugo Rodríguez Mendizábal, 2006. "How tight should one's hands be tied? Fear of floating and credibility of exchange regimes," Working Papers 06.03, Universidad Pablo de Olavide, Department of Economics.
    16. António Portugal Duarte & João Sousa Andrade & Adelaide Duarte, 2013. "Exchange Rate Target Zones: A Survey Of The Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 27(2), pages 247-268, April.
    17. Hertrich, Markus, 2020. "Foreign exchange interventions under a one-sided target zone regime and the Swiss franc," Discussion Papers 21/2020, Deutsche Bundesbank.
    18. Bekaert, Geert & Gray, Stephen F., 1998. "Target zones and exchange rates:: An empirical investigation," Journal of International Economics, Elsevier, vol. 45(1), pages 1-35, June.
    19. Mo, Henry & Wu, Liuren, 2007. "International capital asset pricing: Evidence from options," Journal of Empirical Finance, Elsevier, vol. 14(4), pages 465-498, September.
    20. Han, Heejae & Jeon, Junkee & Kang, Myungjoo, 2016. "Pricing chained dynamic fund protection," The North American Journal of Economics and Finance, Elsevier, vol. 37(C), pages 267-278.

    More about this item

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

    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:wly:jmoncb:v:49:y:2017:i:2-3:p:567-578. 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: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879 .

    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.