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How do Retail Investors Adapt to Exchange Rate Shocks?

Author

Listed:
  • Martin Brown

    (Swiss National Bank - Study Center Gerzensee; University of St. Gallen)

  • Daniel Hoechle

    (FHNW School of Business - Institute for Finance; University of Basel - Department of Finance)

  • Alejandra Perez
  • Markus Schmid

    (University of St. Gallen - Swiss Institute of Banking and Finance; University of St. Gallen - School of Finance; Swiss Finance Institute; European Corporate Governance Institute (ECGI))

Abstract

We study the impact of monetary policy on household finance in open economies. We examine the response of retail investors to a policy shock which led to (i) a sharp appreciation of the domestic currency, (ii) a significant increase in exchange rate volatility, and (iii) the introduction of a negative policy rate. Our analysis is based on monthly, account-level data covering bank deposits, securities holdings and trades for a large sample of affluent bank clients. The policy shock leads to a shift of assets away from fixed income securities towards domestic currency bank deposits and foreign currency risky securities. Wealthier clients display a stronger portfolio shift towards risky securities in foreign currency as they search for yield. Investor attention, as measured by trading activity and contacts with bank advisors, increases temporarily after the shock.

Suggested Citation

  • Martin Brown & Daniel Hoechle & Alejandra Perez & Markus Schmid, 2024. "How do Retail Investors Adapt to Exchange Rate Shocks?," Swiss Finance Institute Research Paper Series 24-108, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp24108
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    More about this item

    Keywords

    Household finance; Monetary policy; Financial stability; Exchange rates; Interest rates;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • 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
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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