The CHF/EUR Exchange Rate during the Swiss National Bank’s Minimum Exchange Rate Policy: A Latent Likelihood Approach

Quantitative Finance, 2018, 19(1), 1-11

35 Pages Posted: 27 Oct 2014 Last revised: 31 Dec 2018

See all articles by Michael Hanke

Michael Hanke

University of Liechtenstein

Rolf Poulsen

University of Copenhagen - Department of Statistics and Operations Research

Alex Weissensteiner

Free University of Bolzano Bozen

Date Written: June 23, 2017

Abstract

Between September 6, 2011, and January 15, 2015, the Swiss National Bank (SNB) enforced a lower bound of 1.20 on the CHF/EUR exchange rate. In this paper, we view the SNB's commitment to this lower bound as a put option and use a latent likelihood estimation approach to infer (a) where the exchange rate would have been without this policy (the latent exchange rate), (b) the volatility of the latent exchange rate, and (c) the market's view on the expected remaining lifetime of the SNB's policy. Our model shows that the removal of the policy was preceded by a sharp decline in the market's estimate of its expected remaining lifetime, although the market was unable to anticipate the exact timing of the removal. The model accurately predicts the CHF/EUR rate following the removal.

Keywords: Swiss franc; Latent exchange rate; Currency options; Latent likelihood approach

JEL Classification: G13, F31, E58

Suggested Citation

Hanke, Michael and Poulsen, Rolf and Weissensteiner, Alex, The CHF/EUR Exchange Rate during the Swiss National Bank’s Minimum Exchange Rate Policy: A Latent Likelihood Approach (June 23, 2017). Quantitative Finance, 2018, 19(1), 1-11. Available at SSRN: https://ssrn.com/abstract=2515210 or http://dx.doi.org/10.2139/ssrn.2515210

Michael Hanke

University of Liechtenstein ( email )

Fuerst Franz Josef-Strasse
Vaduz, FL-9490
Liechtenstein

Rolf Poulsen (Contact Author)

University of Copenhagen - Department of Statistics and Operations Research ( email )

Universitetsparken 5
DK-2100
Denmark
+45 (353) 20685 (Phone)

Alex Weissensteiner

Free University of Bolzano Bozen ( email )

Universitätsplatz 1
Bolzano, 39100
+39 0471 013496 (Phone)

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