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Deviations from covered interest rate parity and capital outflows: The case of Switzerland

Author

Listed:
  • Albi Tola
  • Miriam Koomen
  • Amalia Repele

Abstract

We investigate the relationship between deviations from the covered interest rate parity (CIP) and Swiss capital outflows since the great financial crisis. While the CIP held tightly before the crisis, it has been failing for most currencies vis-à-vis the US dollar ever since. We expect CIP deviations to adversely affect outflows, as they generally result in additional costs for Swiss investors. We find empirical support for our hypothesis. Our results show that with increasing CIP deviations, Swiss portfolio investment debt outflows decrease significantly. This decrease could have implications for the demand for domestic currency investments.

Suggested Citation

  • Albi Tola & Miriam Koomen & Amalia Repele, 2020. "Deviations from covered interest rate parity and capital outflows: The case of Switzerland," Working Papers 2020-08, Swiss National Bank.
    • Handle: RePEc:snb:snbwpa:2020-08
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    File URL: https://www.snb.ch/en/publications/research/working-papers/2020/working_paper_2020_08
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    References listed on IDEAS

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    More about this item

    Keywords

    Covered interest rate parity; cross-currency basis; dollar funding; capital flows; portfolio investments;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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